The modern age is all about becoming financially self-sufficient and standing successful on your own feet. Financial independence is on everyone’s mind nowadays and therefore, our generation is gradually moving away from working as employees under an already established organization, and is inclined more towards starting their own start-ups to enjoy the enormous rewards in that unexplored industry. But as you know, there’s a lot of risk elements involved in beginning with your own start-up and the most important risk is the financial risk.
Financial risk can determine the make or break of your business. What are the sources of finance that you select, what is your debt-equity balance, is your business properly leveraged, etc. are some of the questions posing a financial risk.
Dealing with The Potential Financial Risks by Systematic Finance Planning
Every business faces the above-mentioned financial difficulties at some point or the other. But all these problems can be dealt with well in advance if you have your finance base properly figured out. All you have to do is devote some time, efforts and costs to do all of your financial planning and prepare a finance function accordingly. The finance function in your business deals with all the economic issues, not just raising finance. However, the issue of raising finance comes at the very start of your business, and therefore it becomes the most crucial one.
A properly planned financial function shall have a balanced approach towards raising finance for your business. For that, you must raise finance in the form of both equity as well as debt, but at the same time, you must also maintain a debt to equity ratio which is standard throughout the industry. You know that raising Equity is easier as compared to debt. Debt borrowing is quite complex due to the obviously greater degree of risk and several factors that need to be considered before borrowing. To ensure a safe debt borrowing, you can borrow from reliable companies. One such safe option of debt borrowing can be accessed here.
Systematic Planning of Debt Borrowing for Your Start-up
Following are essential points to consider in the systemic planning for your debts:
- First, you must assess how much debt you are required to borrow according to the pre-planned debt-equity ratio. Accordingly, you should then figure out the sources from where you will borrow.
- There are many different types of debt for you to choose from. All you have to do is assess the characteristics of every type of debt and then select the ideal mix of different types of debt. Following are the different types of debt:
- Simple Business Loans: Simple business loans are identical in characteristics with the normal personal loans, i.e., there’s a specific amount to be borrowed, repayable on an agreed future date, at a specific rate of interest for a specific period of time, where everything is predetermined. These loans too have intrinsic subtypes in the form of short term and long-term loans based on the period of repayment.
- Mortgage Loans: These are loans specifically given against some property owned under the business. It must not be confused with asset-based loans. Under these types of loans, the amount is sanctioned only against real estate kind of property. These loans are one of the safest types of borrowing, given the fact that in case of default, that particular property will be confiscated. But it won’t amount to any additional liability.
- Installment based Loans: Loans based on Monthly Installments are quite convenient for your business especially when you are just starting. Because at the start, there’s obviously a shortage of funds, and there’s a constant quest to operate smoothly and maintain your working capital requirements. For all these things, an installments-based loan is the best option.
- Asset-based loans: Similar to Mortgage loans, here you have to pledge assets as collateral security for the money you borrow, instead of property.
- Trade Purchase Credit: This is the most common form of borrowing done by every business. It is not actually any give and takes of money as such like other types of borrowing. In this type of borrowing, you purchase goods from suppliers on credit with a deal to pay on a future agreed on a date.
- Once you make a choice regarding which type of debt is ideal for your business, you must then move onto the next step. The next step is looking for different companies in the industry offering that kind of debt. You need to make a list of all those companies, analyze them and compare them on the basis of various factors like the interest rates, company policy, company’s image among the stakeholders, etc. After comparing, you can then select the ideal company which provides the best benefit for minimum interest costs.
- All this is the process of procurement of debt. But apart from this, there’s also another important factor you need to consider related to debt borrowing. That is the credit rating. To improve the chances of getting the desired type of debt from the desired company, you have to ensure that your business has a decent credit rating. Credit rating is provided by “Standard & Poor’s” organization. The best credit rating is Triple “A,” followed by Double “A,” Triple “B,” Double “B,” Triple “C,” Double “C,” and lastly, in case of Default you get a “D.” The greater the repayment frequency, the higher is your credit rating.
Debt borrowing is an open practice done by all businesses across the world. But it is needed the most in early stages of business, especially in case of start-ups, where things aren’t as sorted out as a well-established business. So, to configure a proper finance function, your business needs well-planned debt leverage. To ensure that your business gets the desired quantum of debt, you need to do the necessary planning. You must first figure out which type of debt is the best suited for your business, out of Mortgage loans, simple loans, EMI type of loans, etc. After that, you must choose the best debt offering company in the industry. And during all the debt borrowing process, you should also make sure you maintain a decent credit rating.