This article was originally published in Hershey Advisors’ monthly Tax and Business Alert.
Start with the financing
Let’s say you’ve drafted a strategic growth plan that discusses in detail the new products and markets that you hope will power your company’s future growth. You’ve performed extensive market research and are confident that your offerings will appeal to customers and that you know how to reach them. Unfortunately, if your plan covers only such topics as product development, manufacturing, distribution, sales and marketing, it probably won’t succeed.
To avoid potential cash-flow issues and other financial crises, your strategic plan should specify precisely how you’ll fund your growth initiatives. If your company is sitting on a pile of cash just waiting to be invested, you’re lucky. Most businesses must finance growth with equity or debt.
Equity isn’t necessarily easy
Using your own equity in the business to raise capital can be a good solution. However, selling ownership to outside investors, such as private equity firms and venture capitalists, isn’t always as easy as it sounds. For starters, you’ll need a professional appraisal of your company and you’ll have to find investors who believe in your growth strategy — and ability to execute it.
Equity financing doesn’t need to be repaid. But, depending on how much equity you sell and how successful your company is in reaching its goals, equity can end up being expensive in the long run. For example, you may need to give up some control to investors, which can lead to disputes over major decisions.
Price of debt
Debt financing, on the other hand, does have to be repaid, and will cost you interest. Depending on the size and financial health of your company and the nature of your growth plans, you may be able to qualify for:
- Term loans,
- Commercial mortgages,
- Construction loans,
- Equipment leases, and
- Small Business Administration loans.
Banks require borrowers to provide detailed financial information and pledge collateral, possibly including your home and other personal assets. They may also hold you to covenants that, for example, prevent you from borrowing additional money until their loan is repaid.
We stand ready to help you weigh the advantages and drawbacks of the financing options available to your business. We can also help you evaluate your growth assumptions to ensure that your profit expectations are reasonable.