Financing | June 2024 3 things to know about capital formation

As you consider different sources of capital for your business, you might be exploring both the advantages and challenges of debt financing versus equity financing. Larger companies typically build a capital structure that includes a mix of both types. And that mix can fluctuate over time, depending on what stage of your business lifecycle you’re in.

For example, early-stage businesses might not have the positive cash flow needed to qualify for and repay debt financing, like loans, credit cards, and lines of credit. If that’s the case, it might be smart to pursue equity financing. Selling a part of your business to infuse capital into it might mean sharing control and profits with an investor, but you won’t have anything to pay back—or interest rates to worry about. This could help keep you in a solid financial position while your cash flow improves.

Then, as your company grows, you’ll be better suited to take on more debt. But in the established or transition stages, debt financing can present a challenge, especially for businesses with large debt-to-equity ratios. The high cost of debt servicing can trigger cash flow issues, which could make debt financing more difficult to secure. In that instance, it can be beneficial to add equity again. For example, if you had to sell some of the equity in your company in the early stages, you may be able to buy it back as your business matures.

Your Truist relationship manager will get to know your company inside and out and can proactively bring solutions and opportunities based on what stage you’re in.

> Explore the pros and cons of debt vs. equity financing.

If the right choice for your business is debt financing, the next step will be convincing your lender to approve your loan or line of credit. One of the main factors they’ll consider is your company’s financial health. They’ll want to evaluate how your company has performed in the past, how you control expenses, what your profitability looks like, and how your company adapts to changing conditions.

Financial records convey most of this information. Your lender will evaluate the quality and regularity of these statements, whether they’re compiled by you, an in-house accountant, or an outside firm. The more organized and accurate your financial records are, the better chance you’ll have of being approved for financing.

A proactive approach to maintaining clean financial records can have an added benefit. With a solid financial infrastructure in place, you can produce and maintain documentation of your company’s ability to produce cash flow throughout the business lifecycle. You can then use this information to drive more strategic decisions, leading to better outcomes—and greater value for your business.

> Get more tips on securing credit for your business.