Business Finance – What to Look Out For

From credit cards and crowd funding to IPOs and VCs, there are a dizzying number of financial instruments that entrepreneurs can use to start up or grow their businesses. With such a vast array of options, it is more important than ever to choose the right instrument for the job. In the world of finance, this is referred to as structuring your business’s finances. Choose the wrong structure, and your business can sink into a bottomless pit of debt and despair. Choose the right structure, and you can build a business empire.

Debt or Equity?

Whether you need $5 or $5 million, there are truly only two forms of finance: debt, which is money that is borrowed, or equity, which involves giving up a portion of ownership in your company. The first step in financing your business is deciding whether to use debt, equity, or both. The choice typically depends upon your personal preference.

If you happen to like being in complete control, then debt is your best financing option. This will provide you with the funding you need without having to answer to anyone. However, it will also leave you deep in the hole right out of the gate; a situation that may be less than appealing.

If you have a company with heavy equipment or real estate that can be used as collateral and you would prefer to maintain full ownership, then debt financing is suitable for you. In such a situation, acquiring debt financing will not be a problem, because lenders like seeing these types of assets.

The leases and loans used in acquiring these assets are usually backed by the equipment itself. In fact, most equipment manufacturers provide built-in financing. However, traditional banks are also excellent sources for loans that are backed by these tangible assets. In either case, the loan or lease term should at least equal the lifespan of the asset that is backing it.

Conversely, obtaining financing through equity also provides businesses with major advantages. When you issue equity in your company, you reduce your stake in the company, but you improve your credit worthiness and do not over-extend yourself.

Equity financing can be obtained from many sources, such as venture capitalists, angel investors, or mezzanine investors. The latter involves the combination of equity and debt to fund business startups or growing businesses, which is a very common form of financing for growing businesses.

Using debt and equity together is essential in achieving maximum growth in your business. Equity provides assets, and banks look for assets when facilitating lending. Equity gives you added leverage, because banks can use the equity money itself as collateral and shareholders or business partners can use their credit scores for additional borrowing.

In Finance, Timing Is Everything

Purchasing a business is a long-term investment. Thus, most of the money raised for the purchase of the business should be long-term as well. This usually equates to the use of equity, because repayment to equity partners usually does need to take place until the business is liquidated or sold. However, long-term capital can also come in the form on long-term loans, which is the reason why a number of entrepreneurs finance the startup or growth of their companies with funds received from 30-year mortgages. For strictly commercial loans, businesses typically do not qualify for 30-year loan terms. Even with the involvement of real estate, loan terms of 15 to 20 years are the industry norm.

Of course, in many cases, long-term money is completely the wrong solution. If a growing business needs access to fast cash in order to meet payroll, purchase office equipment, or buy supplies, then taking out a 30-year mortgage makes absolutely no sense. For short-term capital needs, revolving credit lines, credit cards, short-term loans, peer to peer lending, and factoring are all better options.

Banks are often the best sources of revolving credit lines, short-term loans, and credit cards. However, with interest rates as low as 6% and 36 month terms, peer to peer lending is also an appealing option. Factoring provides a flexible financing option as well, and this is achieved through corporate finance companies and specialty lenders.

Regardless of where you seek out funds for your company, just remember the golden rule that short–term loans should be used to meet short-term needs and equity or long-term loans should be used for long-term needs.

Watch Your Numbers

Whether you acquire capital from giving up equity or using a credit line, all of the capital you raise comes with a price. Loans and credit accounts all have interest rates. Short-term loans and credit cards usually have the highest interest rates. On the other hand, long-term loans backed by collateral have the cheapest rates.

It’s difficult to calculate the cost of giving up equity, but even the most patient of investors will eventually want their money. At first equity may seem like the way to go, but since each investor receives a stake in the overall value of a company, it usually ends up being the most expensive financing option in the long run.

Regardless of the interest rate, it should always be lower than the expected return. Never invest money in any business project that will not generate enough profit to take care of the loan payments, including the interest. You want to compare the overall price of the loan or loans to the projected yearly profits, and also compare the monthly loan payments to the monthly cash flow.

Analyzing all of these factors will help you determine the viability of the business. In the end, you have to understand your numbers and know that you will still be able to afford the deal long after signing on the dotted line.

Hiring Staff: What to be aware of

Establishing a business is truly a feat and an accomplishment. Once you have secured the necessary funds and determined a plan of action, you will also have to hire staff members. As you are piecing together this team, what are some things you need to keep in mind and be aware of?

Determining Your Pay Rate

If you try to determine a pay rate after you have started the interview process, you could end up with a troublesome situation. Reviewing the material at the Australian Government’s Fair Work page can help you to accomplish this goal. You may wish to set different rates depending upon the candidate’s experience and work history. Whatever the situation may be, most potential employees like to know what they will be paid early on in the process. It is professional for you to tell them. After all, the arrangement has to work for both parties.

Creating a Less Stressful Experience for Yourself

While you do have a small business, you might have a large number of applicants. Applicant tracking software is a type of tool you can use to narrow down the possibilities. For example, let’s say that you want to hire employees who have two years of experience or more. The software tracking system would automatically eliminate anyone who does not fit that requirement. Of course, this tool is useful only for those who have strict requirements for the positions. Otherwise, you could accidentally eliminate a really excellent and qualified candidate for the position.

Narrowing Down The Pool

Background checks are another tool to help you eliminate the potential candidates. If something appears on the background check that is not appealing to you, then you can forgo the interview with that particular candidate. After that, you will need to begin the interview process for the remaining candidates. Of course, you should find a person or people who meet the qualifications that you set forth, but you also must get along with the employee. Establishing rapport and creating a productive working environment are both important, and they can really impact your business happenings.

Understanding The Legalities

Before you make the final decision on who to hire, you should understand the legal implications of having employees. The Australian Government’s business website outlines this important information. According to this page, you must, “find out what wages and employment conditions apply to your staff,” “register with the Australian Taxation Office (ATO) to deduct tax from their wages,” “set up employment records,” “pay superannuation” and “comply with occupational health and safety laws.” Failure to comply with one or more of these rules and regulations could mean a lot of trouble for the future of your business and its success.

Establishing a Professional Environment

Perhaps you have some old coworkers who are interested in becoming a part of your business, or maybe you feel that you really have great chemistry with some of the new employees. No matter what the circumstances are, you need to act in a professional manner and have people sign contracts. This is not done only to protect them, but it is also for the benefit of you and your business. You should discuss the stipulations and information to include with your attorney to ensure you are doing everything in a proper fashion.

Setting Clear Guidelines and Requirements for the Job

Hiring a person to do one job and then constantly demanding that he or she do another can be troublesome for the business as a whole. When employees begin their jobs, they should know exactly what is expected of them. A clear list of duties is useful. You may wish to provide a certain schedule or to work with the employees to craft a plan. Whatever the case may be, you do not want to confuse the staff. Sending them all in different directions could mean that your business really suffers in the field of cohesion.

Choosing Clear Pay Dates and Schedules

Remember, even when you have employees who dedicate all of their time and who love the job so much, they still want to know when they are going to be paid. Do not hide this information. When they start to work for you, letting them know the days on which they will be paid is the professional way to handle these situations. Furthermore, you must stick to these dates. Paying employees late is completely unacceptable. You must take the responsibility to ensure that everyone has their pay checks on the appropriate dates.

Creating a Pleasant Work Environment

Once you have hired the staff members and you have discussed all of these important details with them, you want to ensure that these individuals stay a part of your team for years and years to come. To accomplish this goal, you must create a pleasant work environment. This could mean that you offer generous holiday time and sick days, or you might take the company out for dinner once in awhile. Whatever the case may be, focus your goals on creating an environment where employees are happy to go to at the start of each work day.

Hiring staff members might seem a bit overwhelming at first. This is especially true when you are brand new to the business world and have never done this before. However, as long as you are willing to keep some important tips in mind, you can ensure cohesion and success throughout the process.