When a business starts out, many times it will take whatever financing it can get. But over time, a business financing strategy becomes more necessary not only to secure the best terms and rates, but also to access and secure capital on a timely basis.
With business growth comes more complexity, perhaps more business entities, and more capital requirements. Business finance facilities will come due, need to replaced, or added to. So it becomes more and more important to understand the different ways you can leverage your assets and cash flow.
As an example, say an individual owns three different businesses and wants to start a four one, but requires capital to do so. One strategy could be to utilize the borrowing power of one or more of the other companies. But for this strategy to work, the additional financing being sought can only be secured if there are no terms and conditions or covenants attached to the existing businesses that would preclude this from happening.
This comes back to having a semi conscious financing strategy and always considers the needs of today and the needs of tomorrow versus signing up for anything you can get your hands on and worry about the details later.
Business financing can be a very tricky animal in this regard as lenders are always going to take as much security and provide as much restriction as they think they can get away with in order to protect their interests. If you’ve planned ahead, then there should be enough time to negotiate terms and security structures that will secure the lender but not unnecessarily restrict future financing options and flexibility to arrange financing.
Unfortunately, most financing activities are undertaken with some time pressure or business duress in place, resulting in the business owner settling for a sub optimal capital structure in order to complete the deal on the table or take advantage of an opportunity where time is of the essence which most are.
A business financing strategy is all about maintaining a solid understanding of the different ways your assets and cash flow can be leveraged as well as having your financial statements, contracts, and customer accounts up to date and in good order to withstand lender due diligence if and when required.
A lack of a business financing plan for a growing business can result in a balance sheet that looks like a patch work quilt of financing facilities cobbled together over time that don’t collectively provide any incremental flexibility to acquire capital if the need arises.
In many cases, especially when there are different types of assets involved, there can be many different financing approaches that can be considered, provided that the existing financing structure will allow for their consideration.
For example, is a business owner better off leaving his or her senior lender in place and securing subordinated debt financing, or seeking out a new senior lender that will provide greater leverage? Is it possible to secure incremental asset based lending on a priority basis? Can greater leverage be achieved by refinancing certain assets or combination of assets? Is there more opportunity to cross collateralize the other business entities, or will their existing debt financing facilities permit greater leverage and/or other lenders in a secondary or tertiary position?
And so on and so on.
A solid business financing strategy can allows you to 1) expand your business on a timely basis, 2) take advantage of acquisition opportunities, 3) generate the necessary capital to deal with down cycles or even cash flow losses in a timely manner, etc.
Lack of one can leave you scrambling for money and may result in lost opportunity or even business failure when economic circumstances work against you.
To find more about how to develop a sound financing strategy for your business, please sent me an email or give me a call.