STiR coffee and tea magazine

24 STiR coffee and tea | 2023 Issue 5 (October / November) Equity is attractive for many founders when first starting a business and hence they spend lots of time pursuing investors. An equity investor will have many expectations that your company will need to manage over time. For this reason, you need an inves- tor that is aligned with you and your business, McIntyre said. If you do not see eye to eye from the beginning, the future can become difficult, especially if the investor holds a controlling interest. If your investor has a 51% share, it might mean you someday have to do what they say, whether you like it or not. Debt Debt funding keeps you in control. But it's not free. Debt is money you rent by paying interest. Nevertheless, borrowing can be less expensive than selling equity if there are solid prospects for financial success. "When you consider long term success for your business, debt is cheaper," said McIntyre. The most widely utilized form of finance is credit from a bank. Bank lending is relatively cheap, but somewhat hard to obtain. Banks do not extend credit unless the risk of non-payment is low. To borrow, you'll have to put something on the line as collateral, whether your house, your inventory, your equipment, or some other asset. Then if the business fails, the lender has something to offset the loan. It takes at least two to three months, if not six to nine months, to get a loan. Factor this period into your business planning timeline, McIntyre advised. Debt financing comes in two primary forms: a term loan or revolving credit. With a term loan, the company will make equal payments each month until the balance is paid off, whether the term is as short as three months or as long as 30 years. This can be prob- lematic, however, if the monthly payment must come from cash flow, said McIntyre. It also puts more debt on your company's balance sheet. A revolving line of credit gives you access to funds that you pay down as wanted. By paying the outstanding balance down, you usually can gain access to a larger line of credit. You establish a credit history with a bank, which provides a good way to grow in the future. Asset-based lending involves obtaining credit that is secured by a business asset. This might be a physical asset, such as inventory or equipment. Often it is a liquid as- set, such as the company's accounts receivable, i.e., the invoices due for payment to the business. This type of financing is sometimes called invoice factoring or invoice flooring. Many large importers offer a service called three PL, or third-party logistics. They will purchase your company's product at origin and resell it to you at its destina- tion. That helps ease cash flow, but the privilege costs money. One example is when an importer gives a roaster financing. They fund the roaster to buy the coffee, they transport it, and then charge an interest fee. Public sector sources Government agencies in many countries help companies access bank finance, such as by providing a guarantee for part of a loan's value. In the United States, for example, the Small Business Administration (SBA) will provide a guarantee for a qualified business of 50% to 85% of a loan's value. SBA has special low-coast loans for businesses and agricultural cooperatives in places that have been officially declared disaster areas, called SBA Economic In- jury Disaster Loans (EIDLs). These have become increasingly important amid today's rising tide of hurricanes, floods, wildfires, winter storms, droughts, and other calamities. During the pandemic, SBA operated a special program called the Covid-19 EIDL, which provided $351 billion in loans of up $2 million each to some 3.9 million businesses. It also ran a $790 bil- lion Paycheck Protection Program that covered eight weeks' worth of payroll costs including wages and benefits as well as some interest payments. More than 92% of the loans were for less than $150,000. Most were forgiven. Fintech Over the past 10 years, the banking land- scape has begun to be reshaped by the entry of financial technology companies, so-called "fintech" firms, which provide new digital platforms that facilitate trans- actions, savings, investment, and credit based on software, the internet, and ex- tensive use of data. Some fintechs specialize in various types of merchant cash advance. This is a lump sum cash loan that the fintech collects by taking a margin on the bor- rower's daily credit card and debit card receipts. The advantage is that a compa- ny can easily gain approval, getting access to cash within a day or two. But the cost of this kind of advance is high. "Those are starting to get risky and difficult be- cause you're literally pulling out of your cash flow, and there's no way to keep that from happening," said McIntyre. Other fintechs offer crowdfunding, providing a digital platform that helps a new company or project obtain money from lots of online contributors. Some- times funders provide money as free donations, other times they expect to be paid back in interest, equity, or delivery of a product or service. Risk profile Be sure to assess the funding climate, suggested McIntyre. "There's still a lot of cash sitting around, where people or in- Gaining access to bank credit requires keeping close track of your business's ratio of debt to equity as well as its revenues, cash flows, and profit margins.

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