Working Capital Financing Strategy

A business needs to finance its working capital requirements using a combination of short term and long term funding sources. Permanent working capital is best financed with long term funding such a equity or long term loans, whereas temporary seasonal working capital is best funded by short term loans or overdraft facilities.

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Optimum Capital Structure for a Business

The capital structure of a business is the mixture of equity and debt it uses to finance its operations. The optimum capital structure is one which minimizes the weighted average cost of capital and thereby maximizes the valuation of the business.

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Business Valuation Methods

When a business is seeking funding it will usually require a valuation. There are various business valuation models which can be used including PE multiples, assets based and discounted cash flow techniques.

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Convertible Loan Notes

Start-up businesses use convertible promissory notes to raise seed capital finance as they avoid the difficult process need to value the business valuation. The loans are repaid by the issue of new shares to the noteholders.

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Cost of Equity Financing

Equity financing is one method of funding a business. The cost of equity financing arises from the fact that part of the ownership of the business is sold in return for the funds, and a percentage of the profits now belongs to the investor shareholder.

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Cost of Debt Financing

Debt financing is one method of funding a business. The cost of debt financing is the interest and fees paid on the debt which are usually allowable for tax purposes. For this reason, the aftertax cost of debt financing is normally cheaper than the cost of equity financing.

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Sustainable Growth Rate

The sustainable growth rate calculator formula can be used to calculate whether a business can finance its planned growth from internal sources of finance such as retained earnings, or whether it has to seek additional external finance by issuing new equity or amending its financial leverage.

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Crowdfunding and Financial Projections

Crowdfunding is a technique for a business to obtain finance in which small amounts of funding are raised from a large number of people (the crowd). Crowdfunding can be either rewards, debt or equity based depending on the requirements of the business.

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Cost of Trade Credit

When early payment discounts are offered by suppliers, the cost of trade credit needs careful consideration as the effective interest rate can be very high compared to other forms of finance.

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Cost of Offering Early Payment Discount

The cost of offering early payment discount to customers needs careful consideration by a startup business as the effective annual rate is normally very high compared to other sources of finance.

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