The greatest challenge that any fledgling company faces is securing the money needed to either launch new operations or support growth. Fortunately, there is literally no shortage of creative ways for you to finance your business venture. Unfortunately, each of these different financing methods bring their own inherent challenges with them. This places even more responsibility on your shoulders to make the right decision when it comes to funding. Given all that could potentially be riding on your decision, sometimes it’s more advantageous just to go the simplest route.
The Challenges Posed by Selling Equity
For many companies that find themselves in same position that you do in needing financing options, the temptation to sell off ownership of the company is ever present. Equity financing can be a viable option in certain cases, bringing with it the potential for new relationships with strategic partners that could add value to your organization. However, it’s not without its drawbacks. There’s the challenge that comes with finding the right types of investors in the first place. Once you do, you then have to face the reality of giving up a certain degree of control over your company’s future. Depending upon the stake your investors hold, they may require a proverbial seat at the table when it comes to decision-making privileges. Even if you are able to come to a joint ownership agreement that is agreeable, there are certain regulatory guidelines and reporting protocols you must adopt to keep investors happy and/or remain compliant to federal standards if you’re equity financing is achieved through an IPO.
An alternative to equity financing without the same degree of inherent risk is traditional debt financing. This involves selling bills, bonds, or individual notes to institutional investors like money managers, investment banks, insurance companies, commercial funds, and hedge fund investors. Such a financing option does not dilute your ownership interest in your company, and you only remain on the hook for the original agreed-upon principal. The institutional investor is not entitled to any portion of your future profits. Plus, you can actually save on the overall cost of your debt financing package by writing off the interest on the loan on your company’s tax return.
Preparing to Apply for Your Loan Package
While debt financing offers a relatively stress-free funding option compared to other alternatives, institutional lenders will often require very detailed records before considering a loan package. Fortunately, organizing such information isn’t that complicated, provided that you know what to look for.
All of the documentation required to obtain debt financing can typically be broken down into the following categories:
- Company profile: On top of providing a high-level description of your business, you also need to include documentation specifying the industry in which you operate, your facilities, the number of people in your workforce, your articles of incorporation, corporate policies and bylaws, and an organizational chart detailing your management structure, as well as the names of your attorneys, accountants, and consultants.
- Product and service information: Documents describing the products and services that you offer, your production capacity, and a detailed list of the raw materials that you have on hand as well as one identifying your suppliers are also required.
- Financial documents: Potential lenders will also want records that show your company’s financial history along with current unaudited financial statements. You’ll also need to provide information on your organization’s current financial needs, your insurance coverage, your accounts receivable and payable, and your projected earnings for next year.
- Loan details: Finally, you’ll be required to furnish information regarding the purpose of the loan, the assets you’re willing to offer as collateral, the amount that you need, and the timeframe in which you wish to repay it.
Plenty of attractive debt financing opportunities are out there for you to take advantage of that will allow you the working capital needed to support your business venture. Placing yourself and your company in the right position to qualify for such funding needn’t be overly difficult; you and your management team simply need to do your due diligence in assuring that you’ve got all of the information needed to satisfy the documentation requirements of prospective creditors. Having such information readily available will make your task of finding funding a veritable walk in the park.
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