Business Funding Strategies Article

Business Funding and Finance Strategy – How to Analyze Funding Sources and Develop Business Funding Strategies

This Article is Part Three of ABC Business Consulting’s Business Finance Series. In part one, Financing a Small Business, we talked about the importance of a Business Plan: financing from a position of strength, leveraging Equity; how to utilize Debt Finance; Business Finance relationships of Cash, Risk & Value; and IPO Funding. In part two, Funding Sources for your Business, we looked at Business Capital Needs, Pitfalls & Considerations and Commercial Finance Forms & Sources (Short- Term and Long- Term Finance, Supplier Funding, Debt Capital, Equity and Venture Capital Finance and Alternative Business Finance Sources).

In this Part Three Business Finance Article, we will look more closely at Analyzing Business Funding Sources and developing an Effective Business Funding Strategy. We will examine Business Finance Feasibility Factors, Internal Capital Generation, Trade Credit, Debt Finance; the Relationship (and Combination) of Debt and Equity Finance; how to combine different Business Funding Sources; developing an Effective Business Funding Strategy; and, providing Business Funding Resources. Business Finance can be tricky and complicated. We will try to uncomplicated this critical part of your Business’ Growth so you can find the right sources, and most importantly, combination of business Capital for your particular company needs and requirements. Having a well developed Business Funding Strategy is an absolute must before implementing a Finance Initiative.

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I. Business Finance Feasibility Factors

A. Cost: How will each Funding Source affect our Company’s Earnings?

1. Plug in the Interest Rate and Equity Participation Models into your Income & Expense Statement and Cash Flow Statement to see the effects of Debt and Equity Finance on your short- term and long- term Earnings and Cash Flows.

B. Risk: What levels of risk exposure are associated with the different Sources of Funding you are considering?

1. Equity Finance holds less risk to the Company than Debt Finance as the Equity Investor is taking all the risk.

a) Determine the Risks on your Cash Flows which Debt Capital imposes. How does mixing Debt and Equity Finance affect your Risk Threshold?

b) Remember: Debt Finance is conservative but it does present an inherent interest rate and default risk. Leveraging your Debt exposure with Equity Funding can be a very effective means of reducing your Total Finance Risk.

C. Flexibility: Will covenants and conditions imposed by your Potential Funding Sources reduce your Flexibility in obtaining future Capital or leveraging internally generated Capital?

1. Business Loans and Commercial Finance can carry stipulations which might prevent you from pledging receivables, inventory or other collateral for future borrowing.

a) Be careful in packaging your collateral and asset classes when negotiating your Debt Finance.

2. Consider Sale- Leaseback Structures to maximize Loan to Values and Tax Advantages on your Equipment and Machinery.

a) Lease Structures are very flexible and are structured specifically for certain assets.

3. Consider Cross- Collateralizing your Assets only if absolutely necessary as this Business Finance Practice can take away a lot of the future flexibility for collateralizing loans.

4. Rolling Credit Lines can be set up using a variety of Collateral Sources and provide instant opportunity Capital when needed.

a) You could use rental income from a Real Estate Investment to secure a Line of Credit.

b) You can use Blue Chip Stock Portfolios as LOC collateral.

c) Think outside the box and reserve your major Asset Classes for your Major Finance needs.

i.e. Real Estate Assets for Long- Term Finance.

-Equipment and Machinery for Lease Finance.

-Receivables for factoring when needed.

-Inventory for short term finance needs.

-Cross Collateralize Personal Assets for your Line of Credit Opportunity fund: Rental Property, House, Condo, Stocks, Cash Value Life Insurance, etc.

-Utilize supplier credit to leverage your LOC if necessary.

Note: Short- Term Finance is often much more expensive than Long- Term Finance so ensure your anticipated Revenue Growth & Cash Flow can quickly pay it off. Remember the Matching Rule

D. Control: Can your ownership control be affected?

1. Determine the effect of Board of Directors representation.

2. What Operating Mandates does a potential Equity Sharing Agreement contain?

3. Will pledging of Shares for Equity or Debt Finance inhibit your control down the road? i.e. May not affect present day operations but could affect Operations down the road as your Stock Structure, Ownership Structure or Business Structure changes over time.

E. Availability: How has availability to certain Business Funding Sources been affected?

1. Economic Conditions can severely limit the availability of Bank Finance. Prolonged Economic Downturns can limit Equity availability.

2. Timing is key for Equity Funding. Are the Venture Capital Funds you are interested in still investing in opportunities or have they closed the fund or pledged their remaining funds already?

3. What Alternative Funding Sources are in your Funding Strategy if availability for anticipated, preferred Finance Sources dries up?

F. Analyzing Funding Factors:

1. Which of the prescribed Business Finance Factors are most important?

a. Prioritize your Factors to be applied to your development of the Company Funding Strategy (to be discussed in a later section).

b. Prioritizing will allow you to easily assess how certain Finance Sources can or cannot be used, as well as, enable you to you to begin structuring your Funding Instruments and Products.

This article is an excerpt of a Chapter from our Business Success Guide. For the rest of the Chapter, please visit:  The Business Success Guide. 

The remaining major sections of the book’s Chapter have been left below as an outline so you can get an idea of what else is contained in this Chapter of the Business Success Guide.

Notes:

*: See ABC Business Consulting’s Business Planning Workbook & Guide for more details on Budgeting Systems and Milestone Achievement.

**: For an example Schedule of Real Estate Holdings, see ABC Business Consulting’s Business Plan Workbook.

***: Please see the previous Article in this Business Finance Series, Funding Sources for your Business, for more information on establishing good Banking relationships.

****: Can be converted to cash in 30 days. –Indicates the adequacy of a Company’s Short-Term Capital position.

Remaining Chapter Outline

II. Internal Capital Analysis

III. Trade Credit and Debt

A. Trade Credit

B. Debt

IV. Relationship of Debt and Equity

A. Leveraging

B. Cost of Debt and Equity

C. Factors

V. Combining Business Capital Sources

VI. Effective Business Funding Strategy

VII. Business Funding Resources