More Reasons For Having A Business Financing Strategy

In my last post, I laid out why its become more important for business owners to have a more formalized business financing strategy in place on an ongoing basis for their business.

Here are some additional reasons why this has become more important in the current market.

  • No Senior Lender Security.  With the capital markets in major melt down, no senior lenders are guaranteed not to suffer significantly from the current recessionary process.  As a result, no matter who you’re senior lender is or how long you’ve been with them, and whether you’re in covenant or out of covenant, there are no guarantees that your demand loans will not be called or reduced now or in the near future.This means that all businesses need to have their financing profile up to date at all times and they should also have an ongoing awareness of their primary and secondary options to finance their business if required.  For many, many businesses, this is something that is beyond comprehension as several have gone decades without any senior lender related issues.  But the world has changed, and its time to adjust or be left scrambling when circumstances move against you.
  • Source of Contingency Funds.  The term contingency planning is often brought up but seldom put into any type of practice for most business operations.  With the tightening up of capital markets and the unpredictability related to securing incremental business capital, its become more important to have a capital contingency plan in place.  This can involve working towards reducing the amount of leverage as a percentage of equity on your balance sheet, creating credit reserves in your cash or debt financed lines of credit to allow for short term down turns in business, developing emergency funding plans and sources of financing that can be injected into the business if required on short notice.
  • Lower Risk Growth Plans.  While all businesses have the ultimate desire to grow and enhance profits, the strategic process for planning and implementing growth strategies need to take capital requirements into consideration to a greater extent that what we’ve typically seen in the last decade or more.  Strategic plans need to be more closely reconciled to more conservative capital availability predictions so that the business does not get over extended during a tough to predict and manage external capital environment.  This can be a major departure for aggressive business owners who are used to always being able to fund whatever projects they want to undertake whenever they want to undertake them.

This speaks to a more conservative approach to third party financing, whether it be debt or equity, until some reasonable amount of stability returns to the capital markets.

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About the Author Brent Finlay