Financing Your Company

By Stan Prokop
Businesses need to in essence estimate the funds they will need ' over time'. We say over time because those funds will cover different periods in the company's growth.

Broadly speaking we can call this 'financial planning ', however the whole process is somewhat more complicated due to the external financial and economic environment.

Naturally after a firm develops some solid estimates around capital and growth needs the question then becomes 'How much of this funding should be borrowed via debt?'

Contrary to what management and financial mangers understand, debt is actually the cheapest for of long term financing, supplemented of course by the fact that the interest on the debt is tax deductible. So should the business owner or financial

executive take on all that debt? Clearly too much debt will restrict and potentially damage the firm, and perhaps even exposing the company to failure. Having said all that the business owner still then has a legitimate right to ask "What is the appropriate amount of debt for my company then?"

The answer is that a company has to plan towards finding a target debt ratio, or capacity that reflects their business and industry, as well as the concerns of any of the owners, re: guarantees, etc.

The essence of the business owner's analysis is the ability to understand the company cash flows which will pay down, or service that debt. Most business owners don't do enough planning in this area, and their analysis needs to be much more formalized.

Company owners quickly understand that because there is a limit to how much debt a company can take on, there has potentially to be an influx of owner or equity capital. Business owners and equity investors at that time have to have a strong sense of the value of the company both currently and on a longer term basis.

Business owners must be totally focused in the current environment of understanding the current realities of loan and debt negotiation. It is here an experienced advisor can become invaluable. Quality of the lending partner becomes key here. Most business owners eventually realize that all the banks have, give or take the same rates. They don't have the same people though! Therefore quality of service and commitment from the lender becomes ultra important.

In summary, business owners need to constantly assess their needs for debt or equity capital. Those needs are immediate, intermediate, or over the longer term. Cash flow and owner philosophy on borrowing will dictate how much capital, and as we have seen, from where it comes. Owners that plan and understand the borrowing market will be more successful than those that do not.