The Best Use of Your Financial Statements – When You Need Outside Funding
Sometimes your company will need a cash infusion from the outside to keep things going. When that happens, you have two options for bringing in money: equity or debt. The ﬁnancial statement analysis can shine a light on which option makes more sense for your company right now. A number of factors can play into this decision, including the current debt ratio and the existing equity structure.
When your company has a favorable debt situation and an existing relationship with a bank, getting a loan can be as simple as ﬁlling out a couple of forms. If your company already has as much debt as it can handle, or a debt ratio too high to allow for a bank loan, consider other sources for a business loan. When your company does borrow from your friends or fam- ily, treat it like any other business loan, complete with comprehensive loan terms and binding paperwork.
Equity ﬁnancing may be tougher for a small business, especially one that’s not incorporated. When you and your existing partners are already tapped out, inviting new investors dilutes your equity. Even if the investors won’t act as co-owners, and won’t take active roles in the daily business management, they’ll want to see a piece of the proﬁts. In fact, before they’ll invest a dime, they’ll want to see a clear picture of your company’s growth and proﬁt potential, and just how much return they can expect to get on their investment.