Financing Business Growth

Sales does not always solve everything in business. Often a growth in sales means a growth in inventory, accounts receivable, payroll, infrastructure and other expenses. In these cases an infusion of permanent working capital in necessary to keep up with the growing business. Building infrastructure and tangible assets to keep up with sales is much easier to finance than working capital.

Although working capital is a necessary and understood borrowing need for growing business, it is also considered unsecured. Often these loans are funded with an SBA guarantee or retained earnings from the business. Depending on how much permanent capital is needed, a lender may recommend you find a venture capital source or an equity partner.

Below is a quick analysis that will help you determine whether a lender could fund your growth, or if you should seek venture capital or other equity sources.

EBITDA/(New Debt Payments + Existing Debt Payments)=1.25 or greater

When computing the equation make sure you use annual figures for your business. If the last 2 or 3 years in business this ratio is greater than or equal to 1.25, a lender may finance your working capital request. A lender will also want to make sure you have extra collateral in the business to help shore up their repayment risk if you default. Significant growth does not normally meet the conditions above and requires more structuring to obtain the necessary commercial loan.

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