All About Choosing Cash Flow Financing for your Business
To promote the creation of a small or medium level enterprise (SME) or its expansion,
15:51 13 February 2020
it is essential to choose the most convenient loan to prevent it from becoming a nightmare. A correct choice is not only about interest and fees.
TYPES OF CASHFLOW FINANCING OPTIONS
The following are some cash flow financing options that we present to you, so that you take into account the most appropriate, according to your project or type of business.
As Friends, Family, and Fools is the first source of financing, it is used for the constitution of the company itself and occurs when an entrepreneur starts his business thanks to the help of his family and friends.
They are used to generate business models and project development, that is when it is more advanced than a simple idea. They are also used to create prototypes that help to market the product or service in the market.
It is a loan that delivers the amount of money needed to start a company and finance key activities during the start and start-up of the project. It is considered when the company exists and has some promising new products but requires money to operate or for working capital.
Operational companies generally receive this type of contribution, since their highly innovative content or potential development they attract credits. Generally, angel investors are independent or belong to a club, as they style networks of this type of support in companies.
Also known as Venture capital, it is used when the company has a certain level of development. It is an investment fund of a large amount. It is a temporary contribution of third-party resources to the assets of a company to optimize its business opportunities and increase its value. In this way, solutions to business projects are given, risk and returns are shared.
This is a fund for large companies and is used to expand the business or for internationalization. It provides capital in exchange for shares that the company grants. It also aligns with monetary resources such as contacts, best practices, administration, etc.
Companies can resort to bank financing to have flow in the daily operation of the business. In addition to commercial banking, there are companies dedicated to financial factoring that perform such form of financing.
SO WHICH OPTION SHOULD YOU CHOOSE?
In principle, there are two types of financing, one of which constitutes a liability and must be paid in the short term or and the other one is in the long term. It includes the credit granted by suppliers, advances made by customers on their orders, bank loans in the form of credit lines or factoring contracts, leases of equipment or vehicles with the option to purchase, mortgage loans or pledges. and the bonds issued in the financial markets.
The one that becomes equity in the form of shareholdings, grants, and reserves, which do not require their return but become indefinite financing.
Options to choose
Except for some forms of financing that constitute the social capital of the business, those that make up a liability are options that you should evaluate according to your payment conditions and the benefit that they provide.
The competition between financial institutions and the new modalities of collective financing that the internet has allowed has given rise to a variety of attractive conditions in one or another measure and you need to know them to make the best decision.
Factors to consider
- When choosing how to finance your company, you need to evaluate what stage of development it is in, what is the financial burden of financing and how it will improve your assets.
- Finding a loan to finance other obligations is a mistake. In that case, it is best to restructure previous loans and seek savings in operating costs to return to profitability.
- All credit or financing must contribute to a productive purpose linked to the growth of the business and be justified with a business plan that promises benefits and profitability.
- In deciding what type of financing to seek also influences the control you are willing to give in the direction of the business in exchange for financial support.
- In the case of direct credits, whether through internet platforms or financial institutions, your only obligation is to pay them, and all control remains in your hands.
- But when it comes to partners or venture capital investment funds, the investor hopes to have a say in the decisions that are made.
- Carefully define your financial needs and your goals so that you choose the best option without compromising the profitability and future of your business.
Which one to use?
Choosing what type of financing to use is a decision that corresponds to the chief financial officer, who must evaluate the cash flow and the cost-benefit ratio of the financing, in order to maximize the profitability of the company.
In short-term financial planning, it must be ensured that the business has the working capital to carry out its operations and also look for the capital that allows taking advantage of commercial or growth opportunities.
Likewise, the chief financial officer must invest any surplus of cash in order to put the money to work and maximize its return, provided that the investment instruments he uses have the necessary liquidity to be able to occupy the capital when needed.
On the other hand, when planning for the long term, it is sought to avoid reducing profitability by financing fixed assets and some current assets with long-term debt.
The financial management must foresee any insufficiency of the cash flow to look for the type of financing convenient, both in terms and in interest rates, to guarantee the continuous operation of the business and the maintenance of its profitability.
When a company is growing, the sources of financing available must be envisaged to meet the proposed investment projects, whether short or long term.
The financing that is required can be used as working capital or for the acquisition of fixed assets, but it is important to carry out a real projection of the company to guarantee that the financial obligation can be met without affecting its profitability, and even his livelihood.
The vital aspect is to compare the products and see which suits your needs and matches your business. Some entrepreneurs must resort to business financing to create or grow their businesses, but, among so many offers, which one suits them best. That’s what matters in the end. Success or failure depends on the planning of finances in companies since at all times they must have the working capital to develop their productive or commercial activities.