New Debt Finance for a Business Plan
For a business, new debt can take many forms including loans, mortgages, borrowings, overdrafts, and credit cards. Generally any form of finance on which interest is paid is regarded as debt. Debt represents amounts owed by the business to providers of finance usually referred to as lenders.
The amount of new debt needed will depend on many factors including finance availability, the level of investor capital, and the cash available from trading operations.
When estimating new debt make sure that the level is in line with the rest of the business plan. For example, debt is often used to finance the purchase of long term assets such as plant and machinery. If growth and capital expenditure are planned, then check to ensure sufficient finance is in place to support the purchase.
Generally it is a good idea to match the type of finance with the asset being purchased. For example, suppose you plan to purchase a machine with a useful life of 5 years. In these circumstances a loan of similar term is best suited to allow repayment over the useful life of the asset.
New Debt in the Financial Projection
Obviously having estimated the level of new debt required, it needs to be included in the financial projections template.
New debt represents cash flowing into the business from the lender. Consequently it is included in the cash flow statement as a positive figure. For example, suppose in year 2 the plan is to borrow 46,000 to help finance the purchase of new equipment. The amount of 46,000 should be included in the cash flow statement on the proceeds from long term debt line.
Care should be taken not to include any amount already included as part of the debt opening balance, as this would result in double counting.
Estimating new finance is an art not a science. No one expects you to be able to predict the future. You are making educated guesses based on the information you have available to give a realistic estimate of the new finance requirements. Make sure that the new debt is in line with the rest of the business plan, and avoid too much detail in analyzing the types of finance you might have.
What’s the Next Step?
This is part of the How to Create Financial Projections Guide. The guide is a series of posts on using our template to produce simple financial projections for a business plan.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.