The Business Finances Pyramid Provides a Healthy Balance of Capital Sourcing

Updated on November 24th, 2020
financial habits

Say you are a startup or an established business looking to expand. When it comes to keeping your business finances pyramid 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. 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. Often are involved in strategic decisions. They 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. 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. This may not make it worthwhile to many businesses.

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 debt 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. Those in different stages of growth, industries, and strategic objectives require different servings of capital sourcing. However, this example of recommended capital financing allowances. It offers a framework to work from that balances out the benefits and risks. This gives you the funding potential to build out your business. It should help achieve those objectives that often require more money to fuel that growth. Select wisely and use the funds prudently.

John Rampton

John Rampton

John Rampton is an entrepreneur and connector. When he was 23 years old while attending the University of Utah he was hurt in a construction accident. His leg was snapped in half. He was told by 13 doctors he would never walk again. Over the next 12 months he had several surgeries, stem cell injections and learned how to walk again. During this time he studied and mastered how to make money work for you, not against you. He has since taught thousands through books, courses and written over 5000 articles online about finance, entrepreneurship and productivity. He has been recognized as the Top Online Influencers in the World by Entrepreneur Magazine and Finance Expert by Time . He is the Founder and CEO of Due.

About Due

Due makes it easier to retire on your terms. We give you a realistic view on exactly where you’re at financially so when you retire you know how much money you’ll get each month. Get started today.
Categories

Due Fact-Checking Standards and Processes

To ensure we’re putting out the highest content standards, we sought out the help of certified financial experts and accredited individuals to verify our advice. We also rely on them for the most up to date information and data to make sure our in-depth research has the facts right, for today… Not yesterday. Our financial expert review board allows our readers to not only trust the information they are reading but to act on it as well. Most of our authors are CFP (Certified Financial Planners) or CRPC (Chartered Retirement Planning Counselor) certified and all have college degrees. Learn more about annuities, retirement advice and take the correct steps towards financial freedom and knowing exactly where you stand today. Learn everything about our top-notch financial expert reviews below… Learn More