While financing your small business, always go for the right mix of debt and equity

While financing your small business, always go for the right mix of debt and equity
August 15 05:18 2018 Print This Article

The task of financing a small business activity can come up as a time-consuming activity for the business owners. It tends to be the most crucial and vital part for a growing business and one must be careful regarding the prevention of bad name of the business. The relation between cash, risk, and value turns out to be called as finance. And a proper management of these relating components of finance can provide the business owners with a healthy finance mix for their enterprise.

One should finance his/her business from a position of strength. A business owner should show confidence in the business activities by investing up to 10% of his/her finance requirements from one’s own coffers. The remaining percentage cash needs of a business owner arrives from different sources such as private investors or venture capital. One should always remember that sweat equity is always expected but it cannot act as a replacement for cash.

The result of having a strong cash position in one’s own company relieves the owner from the undue strain of additional debt financing. Debt finance can arrive in the form of unsecured finance unlike short-term loans, long-term loans and line of credit financing. Unsecured debt is also known as cash flow finance and demands creditworthiness. Debt finance is more or less secured type finance where loan is granted based on the inventory, real estate, letter of credit or personal assets and much more. It also includes loan against government guaranteed finance. A customized adjustment of secured and unsecured debt, specifically designed for one’s company’s financial needs proves as an advantage of a strong cash position.

Strategic planning results in one’s effective finance plan. One needs to be cautious while matching his/her cash needs with the cash goals. It is useless to opt for short-term loans for long-term purposes. Violation of the matching rule may result in a high-risk level in interest rate, re-finance possibilities, and operational independence.

The violation of the old age rule to some extent is still permissible. For instance, if an owner requires a long-term working capital, then, in that case, a permanent capital want might be warranted. Having contingency capital for providing maximum flexibility is another better option of financing.

Good financial planning helps in reducing capital costs and the financial risks. For availing better finance planning conveniently, consulting finance professionals, business consultants and loan broker is preferable. It may increase the profit in the long-run.

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Melinda Woodward
Melinda Woodward

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