Your strategic plan for growth is a masterpiece – you have detailed the products, markets, staffing, and sales methods in detail that will make your company a powerhouse in your industry. The market research is done; the product development engineers have presented their ideas, manufacturing facilities are lined up and you are ready to go!
Unfortunately, one essential part MUST be included or all of the rest are doomed to fail. Your strategic plan must specify precisely how you will fund these wonderful plans. How will your finance your growth?
Equity isn’t necessarily easy
Sitting on a pile of cash? You are very lucky, but most of us are not in that position. Most businesses must finance growth with equity or debt.
Using your own equity in the business to raise capital again sounds like a great solution. But selling off a part of your company will require a professional appraisal; making many presentations, a giving up a certain amount of control. You will have to find these investors and convince them that your strategic plan will work and that you can execute it. You will need to demonstrate that the amount of money they are investing is enough to cover the planning.
Even though equity financing doesn’t need to be repaid, it can be very expensive in the long run, depending on how much equity you sell and how successful your company is in achieving the planned growth. Major decisions may have to be negotiated with the investors, and suddenly your dream of growth has become a collaboration.
These factors are not always negative, after all it is better to have 50% of a million than 100% of $100,000. This is a gamble that you have to carefully consider when looking to use your equity for financing.
Price of debt
Borrowed money, on the other hand, does have to be repaid, and will cost you interest, and eventually, the payment of the entire debt. Borrowing also will require you to convince the banks or institutions that your strategic plans and your ability to execute these decisions will work. Projections and the possibility of appraisals still may be required.
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, payable over a fixed period of time, such as 36 months.
- Commercial mortgages, if you have commercial property to put up for collateral. These may have longer amortization periods, but usually have a “call” or date when the balance is due. This could be from three to seven years or longer.
- Construction loans, which are short term over the period of construction and are then replaced by a regular mortgage.
- Small Business Administration loans, where the bank takes some risk and the SBA guarantees a part of the loan. These generally require more paperwork and strong collateral than regular loans.
Banks require borrowers to provide detailed financial information and pledge collateral, possibly including your home and other personal assets. Your credit rating is a higher factor than when you are attracting investors. They may also hold you to requirements called covenants, that, for example, prevent you from borrowing additional money until their loan is repaid.
It is very important to get some outside help when you are looking at the financing options. You may be too close to the planning, and need some outside feedback. Someone who knows what investors and banks require can also help you weigh the advantages and disadvantages of a particular plan, and may suggest alternative solutions. Your growth assumptions need to be properly evaluated.
At VaughnCPA, LLC we have many years of working with clients to achieve their growth goals and to develop reasonable expectations about growth and financing options. Call us at 505-828-0900 in Albuquerque and 970-661-2123 in Colorado. Visit our web site at www.vaughncpa.com for additional tips and information.