The Business Finances Pyramid Provides a Healthy Balance of Capital Sourcing
Whether you are a startup or an established business looking to expand, when it comes to keeping your business finances in order, it’s important to create a healthy balance of capital sourcing to minimize risk and maintain a certain amount of control over the company. In fact, to build the business finances pyramid, you may want to consider a combination of capital sources to provide the maximum benefit while minimizing the potential risk. Here’s an overall recommendation for the amount and type of funding you could leverage for your business:
Super Size the Debt Financing
When it comes to your business, you most likely want to ensure that you retain control over what it is doing and where it is headed. Unlike other capital sources, debt financing does not come with the stipulation that you have to hand over any control to the person or institution that is providing you with the financing.
Although debt financing typically comes with a monthly payment to a bank or other type of lending institution, the other benefit is that the interest is tax-deductible. Additionally, the debt financing may come in the form of a line of credit, which provides a way to just use what you actually need and retain the rest for future expenditures or expansion plans.
Enjoy an Entrée-Size Portion of Equity Financing
The next largest serving of capital sourcing on your business finances pyramid should be equity financing, which comes from places like venture capitalists and angel investors. They become partners in your company and often are involved in strategic decisions and take an equity share of the business in return for the funds they provide.
While that may or may not be something you are sure you want, it can be advantageous in terms of getting access to priceless experience, knowledge, network of key contacts and potential customers and mentoring. This can help propel your business farther along and increase the potential of its success. Also, this type of capital sourcing doesn’t require a monthly payback plan and provides a way to get more funding with a longer period to deliver that return on investment.
Go Light on Off-Sheet Balance and Family and Friends Capital Sourcing
As you reach toward the top of your business finances pyramid, the serving size of the capital sourcing gets smaller because the risk or disadvantages grows in size. Off-sheet balance as a source of funding is not for every type of business because it involves leasing equipment or some other type of asset versus purchasing it. While it keeps a larger purchase off the balance sheet, it comes with strict regulations that may not make it worthwhile. This type of capital sourcing should be considered on a firm-by-firm basis.
The other type of capital sourcing to consume in very small portions – if even at all – is investments from family and friends. This source tends to be more beneficial when you only require a small amount of money. While it feels informal, it should not be handled that way. If you go this route, be sure to put everything in writing and make sure the repayment plans or results are clearly understood. Otherwise, that Thanksgiving dinner becomes really awkward and good relationships are forever lost over a business deal gone south. This risk may not make it worthwhile to you so put a lot of thought into this first before choosing a serving of family and friends capital sourcing.
Season with Mezzanine Capital Accordingly
The smallest amount of capital sourcing should come from mezzanine capital unless you have the type of business where the lenders could convert their loan to you into an equity interest rather than having to repay it. Companies that are far enough along to be positioned for growth could consider this type of capital funding as part of their business finances pyramid. Often, the lenders involved in providing mezzanine capital are expecting a sizable return.
Planning Your Business Finances Pyramid
Not every company’s pyramid of business finances will look the same because those in different stages of growth, industries, and strategic objectives require different servings of capital sourcing. However, this example of recommended capital financing allowances offers a framework to work from that balances out the benefits and risks to give you the funding potential to build out your business and achieve those objectives that often require more money to fuel that growth. Select wisely and use the funds prudently.