Cape Town - Stretching a company's working capital through various forms of "good" debt can be the source of just enough extra cash to fund revenue-generating marketing programmes or help companies manage when customers don't pay bills on time, according to Adam Orlin, head of Investec Import Solutions.
"Good companies require debt to grow – strange sentiment – but true. Think about it. You have a new shipment that you want to bring into the country ahead of Africa’s winter season – but you don’t have enough cash flow and you can’t raise equity – what are your options?" explained Orlin.
"The issue of small business support - in terms of limited cash flow and funding - has always been a major challenge for most such companies. However, a simple solution of managed debt can in fact, be a far more cost effective form of financing your shipping requirements – beyond equity, giving you just the right working capital to get that shipment off the ground."
Stable and well-established businesses have both the assets to borrow against as well as the cash flow to service the loans and as such, managed debt financing can make real business sense, in his view.
He provides a few tips when financing through debt:
- The company has to have a revenue stream in-order to qualify as risk evaluations are based on ability to pay back the loan;
- The company must have assets to secure a loan. Lenders might need to look for assets to secure a loan or personal assets to guarantee payback. If you would like to get a loan be prepared to put your personal assets at stake if you do not have a lot of company assets;
- Pay off your loan quicker. When paying back the loan, pay more than the minimum required. That way you can pay off your loan faster and you can apply for another loan after the first one is paid off;
- Self funding can limit growth. Self-financing companies can find themselves in a position where they run out of cash and become desperate for financing. This can lead to loss of leverage. As a result business need capital to fund their growth Take debt for bigger expenses;
- Every business has different funding needs, but certain warning signs signal that a company is taking on too much debt. A healthy company should not be taking on debt for operating expenses, but for infrastructure or asset acquisition for growth;
- Businesses should be able to attract finance. You also have to make sure your business is positioned to attract financing – when the opportunity arises. This may also mean that the business owner has to put up their own money and invest in their business idea. This shows they have faith in what you’re pushing;
- You can’t limit yourself and you have to exhaust all avenues when trying to secure funding, but your product/service needs to be believable and potential investors need to see a return on investment (ROI) before you can even start talking numbers.
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