If you want your business to grow,
it's important to get the right financing. However, one of the biggest
challenges for companies is finding an affordable plan that has the features
they need but doesn't cost too much. This shouldn't be a problem if you have a
sound debt framework in place. Here are some tips for ensuring you achieve a
low-cost capital base:
Know the options between equity and debt
There are two types of capital that
a business can use to grow: equity and debt. Equity is the ownership interest
in a business, which means that if the company is sold, you will receive some
of the proceeds. Debt is a loan that must be repaid-with interest (but no
ownership).
Debt has different tax implications
than equity; for example, interest paid on debt gets deducted from your taxable
income whereas dividends paid on equity do not.
Because of this, taking out loans to
finance your company may be more beneficial than selling shares in your
business.
Use debt framework as a basis for lower-cost capital
Let's assume that you want to get
capital for your business. The first step is to decide how much money you will
borrow, then figure out how much interest you'll have to pay on that loan.
Next, think about how much equity (or "skin in the game") you're
willing to give up in order to get this money from investors.
The next step is figuring out what
portion of our company we can afford to give away. Equity is generally worth
more than debt because it gives the investor control over decisions about where
the company goes and what it does next—and therefore an opportunity for profit
if those decisions are successful. Debt doesn't come with voting rights or any
other form of control over decision-making or future profits; so while it might
be safer than equity in some ways, it's not necessarily better when considering
how much risk investors want themselves exposed to.
Learn how to strategically use financing entities
As a startup, you’re likely to have
little to no access to traditional financing options. This can make it
difficult for you to raise capital quickly and efficiently. However, there are
other ways of acquiring funding when traditional sources aren’t available.
One such method is through financial
engineering strategies—the use of vehicles and instruments in order to lower
cost, increase flexibility and improve liquidity. These include:
- Debt financing. It deals with loans or lines of credit
that require repayment at specific times. The timing can be short-term
(less than one year) or long-term (more than five years). A debt
instrument is usually backed by any type of asset collateralized against
it; this is called “securitized debt."
Debt instruments include:
- Bonds. It is where investors lend money in exchange for
interest payments over time; these can be short-, medium- or long-term
bonds depending on the length before repaying principal investment back
into the investor's account balance
Always consider tax implications when deciding on a financial structure
You must always consider the tax
implications of your financial structure. For example, debt and equity are not
taxed in the same way. Interest is deductible against profits, but dividends
are generally not. The same applies to hybrid structures where there is a mix
of debt and equity (e.g., a convertible bond).
For this reason, many businesses use
different types of financing to get around these restrictions while minimizing
their total cost of capital by matching up their interest expense with taxable
income rather than classifying it as dividend income which would incur further
corporate tax rates (for small businesses)
The
right financing plan will help your business grow.
A lower-cost capital is more
efficient, flexible, and secure. It allows you to grow your business faster and
more profitably by providing access to the right kind of financing.
Why is it so important to have
low-cost capital? Because it’s the difference between being able to make big
investments in your company and being unable to do so—and that can have a huge
impact on your growth trajectory. A low-cost capital means higher profits—not
just for you but also for investors who are interested in seeing their money
grow as much as possible.
Conclusion
As you can see, there are many ways
to achieve lower-cost capital for your business. The keys are understanding the
difference between equity and debt financing, as well as how each works in your
business model. You should understand the advantages and disadvantages of each
so that you can make an informed decision about what is best for your company’s
needs.
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