Debt Or Equity - Which Is Right For You?
debt versus equity biggest issue, which is right for you for your specific situation. Now, I'm gonna put ourselves all in. I know you have some active businesses here that are generating money from customers. We love that. But I also know you may have some expansion ideas where you need a little pile of a cash to build your business further. So in those circumstances, all of a sudden your expenses may be growing within your business again, right? Or if you're a startup entrepreneur, we lost the T here, somehow it will come back. Um, you're starting here before you have customers and that operating cash flow, aren't you? At the highest point for possibly running out of cash and going out of business? It's when your risk is higher to you personally, once you get your first customer, your chances of going out of business drop. When you reach the milestone of cash flow break, even your risk of going out of business drops again. Why? Because you are not the only person funding your business...
, You are investors. So if you are looking at a business that has a long term product development life cycle, that a much longer time to achieve these same milestones, I would favour equity over debt. Let's go back. Remember debt? They want money an interest and principal right coming back to them. Which does what forces you to hand over a little bit of your operating cash to your lenders. So shorter time periods for turning that cash into new customers, you might favor debt. The longer it takes you to get new customers in to start generating at that extra source of cash you favor equity. Does that make sense? So Mixologist had right debt equity. You can use a little bit of both. The safer way to go is equity. When there's a long horizon more than a year. Certainly if it's more than a year, go equity. If you think you can take $5,000 and immediately turn out a new product or a service and generate cash, then you might look at the range of debt opportunities that we're gonna be covering in the next segments. But this is your magic moment. This is when you are the top boss of your future. Making the right call on. This will determine whether you're taking the easy road or the much harder road to success. Another way to look at it, loan proceeds went to favor debt, loan proceeds, your checking account, you spend those proceeds. It may be new marketing initiatives, right? The, the faster it hits the customer and generates the customer where more money comes back to you in a relatively short period of time, favorite debt. And this can happen right where you don't need to sell an equity stake in your business. But if it's a fast cycle, a fast cash cycle favor debt because the cost of that interest rate and again, we're gonna be shopping for the lowest interest rate possible, right? So it's the least cost to you. If it then in turn brings in more customers that you bring out a profit. This is the way to go faster return. Favorite depth. Okay. I want to point out because lenders, this is part of what they expect, lenders talk about cash flow. Why this what you they don't care so much about. Yeah, they care about your customers and revenue growth. They care less about pre tax income. Why? Because that's not what pays them back cash flow. Cash flow. Cash flow is what they're gonna want to hear about because that pays their interest and their principal obligations and is simply right there on your piano. So if you want to master for making presentations to lenders, they're going to talk about the word cash flow. Okay, okay. What's tricky about cash flow? I'm hearing some product businesses here and this is where lenders can help you make an easier way to generate your cash flow. If, for example, you are sourcing materials for your product, I think we've got some toys. Let's face it, A lot of toy production comes out of Asia. I negotiated some of this stuff out of china. You have to buy your raw materials are the product and pay for it. It's then shipped to you. You said you want to then eventually sell to retailers. Maybe it's a toys R us, maybe it's a walmart, They may not pay their bill back to you for six months after you sold your product at retail. Right? So even though the difference in cash flow, when you book a sale to a customer, it hits your piano and everybody loves a new sale. But cash flow is driven by when you're paid. So lenders are going to ask you to kind of do a different form of projection that's really based on when customers pay you.
Ready to master the principles of business funding without frustration? Join financial expert Susan Schreter for a deep dive into debt and equity.
Susan covers everything you need to know to fund a business from inception onward. You’ll learn about how to safely borrow start-up funds from friends and family, and how to research and apply for loans, including micro-loans and SBA loans. You’ll also learn about a wide variety of funding types and the requirements or restrictions attached to each of them. From angel investments to venture capital to crowdsourcing, Susan demystifies potentially confusing funding concepts, giving you the skills you need to confidently grow your business.
Whether you’re just setting out as an entrepreneur or a long-time business owner, this course will help you ensure your business's long-term financial health and profitability of your business.