Sunday, November 19

Capital | Finding the Right Mix

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“All good businesses need a mix of loans (debt) and the owner’s own capital in order to expand. The thing to be careful about is finding the right balance between debt funding and your own capital.”

In your small business, too much debt can create added pressure and stress.

Some important points to be kept in mind for your small business: your cash balance should be monitored regularly; some credit facility should be kept aside for unexpected emergencies; the type of finance should be matched with the asset that needs to be purchased; make sure that your overdraft limit is not more than your need. Debt Reduction should be planned.

It is very important to remember that just because your business has started recording profits, it doesn’t mean you start buying unnecessary items. Non-productive assets can put a pressure on cash flow, and cause problems during the slow times.

Don’t rely on the banks to decide if you have the capacity to pay back the loans that you take out. It is your business and you understand it much more than bankers.

Loans from Banks are not the only way of expanding your business.  There are other options as well, like selling a share of your business to venture capitalists and partners.

Venture Capital

Venture Capitalists are called Financial Sponsors these days, and instead of charging you interest on their investment, they require a share of your profits. These people are generally more interested in rapidly growing businesses, as compared to the normal variety of small businesses. They are only interested in one thing-Money. Financial Sponsors are concerned with how much money will be made through this deal, and does the business have the potential and capability to reach the next level? They are also very concerned about their exit strategy, and since they receive hundreds of business plans and proposals per year, they are very particular about what they are looking for and where they invest. Therefore, if you are thinking of going down this path, my advice to you would be to talk to the respective Financial Sponsors in detail, so that you can prepare and plan your business accordingly, especially in cases where a Financial Sponsor requires a seat on the board. I would recommend that you go to your Business Advisor or Solicitor when searching for Financial Sponsors, so that you gain access to reputable organizations.

Partnerships

You can also have a partner, active or passive to help in growing your business. A partner can be anyone: it can be a person like you who wants to be in business, but doesn’t want to start one from scratch. Instead, he or she may be more interested in investing in an established small businesses; it can, also, be retired businessmen who have an interest in investing in small businesses.

I would generally recommend that you avoid partnerships, unless you don’t have any other option. However, if there is no other choice, make sure that you discuss and document everything, especially exit clauses and prepare comprehensive partnership agreements.

This post was first published on our strategic partner’s website: www.amerq.com

 

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