Previously, we looked at some commonly used methods of financing a business. One of the most important factors underlying business success at any stage of development, after all, is ensuring that you have adequate access to capital - when you need it.

Traditionally, for private businesses that financing may come from personal savings, from friends and family or from a bank - the primary sources discussed in the earlier article, along with the pros and cons of each.

In a future article, we will look at some non-traditional financing sources as well. First, though, let's step back and take a closer look at the basics of financing, because the wrong financing, for the wrong reasons, at the wrong time can drag a business down as surely as too little capital.

No matter where the money comes from, it takes knowledge and planning to make it work for you. To do that, you need to understand what type of financing you need and are able to secure.

Equity financing versus debt financing

Let's start with the basics: There are two broad categories of financing, equity financing and debt financing.

Equity financing shares in both the upside and the downside of a business on an ongoing basis. Debt-financing obligations must be met irrespective of the business' level of success. These obligations are generally fixed and are satisfied upon full repayment.

As an initial step, you should look at your firm's "debt to equity ratio". How much do you owe and how much equity have you accrued? If you have invested significantly in your business, or otherwise developed equity (as through growth or through friendly loans from family), you will be in a good position to attract capital investment from various sources at favorable terms.

If, on the other hand, you have a high proportion of debt to equity, you may wish to proceed carefully with any further debt financing. In such cases, experts say the wiser course is to increase your ownership capital - your equity - in order to avoid becoming over-leveraged.

Think it through

First ask whether or not your business really needs external capital. Is it possible to find savings or more effectively manage existing cash flow?

If you determine that need external financing is in fact needed, take the time to assess things through a lender or investor's eyes. In their shoes, would you give financing to the business? If so, at what price? Once you have done the analysis, your answers to those questions are likely to be quite close to the ones another source would arrive at, too!

• Is the business likely to repay the lender or investor for the risk they take on by assisting?

• What exactly are the business' needs? Are you looking to expand, or maybe to build a cushion? In what specific ways will the money be applied?

• What is your level of urgency and what is your timeline? Do you need funds to respond to a crisis or a squeeze, or are you planning to meet longer-term future needs? Keep in mind that the more urgent the need, the more you are likely to pay for that financing.

• What are the risks, whether in the business itself or the industry as a whole? ·How strong is management? A financing source will want to know.

• How and how closely does your financing need mesh with your business plan? A plan that anticipates specific capital needs on the way to growth and success will speak volumes to prospective financing sources.

Answering these questions will give you a good sense of how capital sources will assess your business, and help you predict how much capital you will be likely to secure and how much it is likely to cost you.

Asgill Post Ltd. provides assistance with Business Valuation, Financial Strategy and the Purchase and Sale of Companies. For comments or queries, contact Kumi Bradshaw MBA, CBA, BVAL via email at kumi@asgillpost.com or phone at 295-3301 Patterson Partners Ltd. provides cross-border tax, estate and investment planning services to dual citizens of the USA and Bermuda, their families and businesses. For more information, visit www.patterson-partners.com or contact Jennifer A. Patterson, CFP®(US), CIMC, CIMA®, TEP via email at info@patterson-partners.com or phone 296-3528.