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Flexible debt management

THE question of debt versus equity is one that will be faced by all business operators at some stages of growth, but the answer will often differ depending on the product or service being sold.

For debt financiers the finance solution rests with debt. Advantages, they say, are that the business owner does not need to surrender any ownership and retains full control. The business is also made aware in advance of cash flow commitments to repay the debt, allowing for accurate budgeting and control of costs.

Debt can also be renegotiated to more favourable terms, providing some flexibility for management.

NetFin director Paul Rowe, who provides debt financing advice, believes that with interest rates having risen for the first time in almost two years, now is the best time to review debt funding and ask questions such as: ‘Do I have enough? Do I have too much? What is it costing me? And could I structure my cashflows more productively?’

“Borrowed money is a commodity like labour, plant, equipment and stock and it needs to be used to the best advantage of the company,” Mr Rowe said.

The disadvantage with debt finance is that the business has a legal obligation to pay interest on debt. If unable to pay, the lender may call in a receiver.

The business owner is also subject to market conditions that determine the level of interest rates.

Owners often are asked to put their own personal assets on the line as a form of collateral. If the business goes sour, personal assets may also be lost. Growth can be inhibited by the company’s ability, or inability, to borrow.

Mr Rowe believes a business plan should be drawn up to determine what the business’s future requirements are.

“If you are looking to buy your premises in three years, then be prepared,” he said.

“If you are looking to bring on more staff, then be prepared.

“There is ultimately no benefit in putting on more staff or even advertising for staff if you don’t have all your funding needs firstly identified and, further, in place.

“What does employing staff do to the bottom line of the business? What secondary capital purchases may I have to make?”

Once a plan is drawn up the business can then make a more informed decision of which avenues to pursue.

Equity also may provide a number of benefits, including the opportunity to take advantage of credit terms with increased liquidity, which may provide a payment discount, improving gross margins.

Equity also limits the business’s exposure to financial risks such as interest rate improvements, al-though the owner loses 100 per cent control and autonomy to make major decisions without external party input.

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