Debt Financing Strategy for Short Term vs Long Term Financing Capital Needs
Updated: Mar 21
Every company is different; there is no one-size-fits-all. This principle also applies to choosing a suitable business financing strategy. One common mistake female founders make is mismatching their capital needs and financing terms. They get caught up in financing hypes, only to realize later it's not right for the business. When you get this right, you can open doors for the right financing strategy—which may be debt financing.
In this episode, we discuss the importance of matching the right finance option to your business's capital needs. We determine the key differences between short-term and long-term capital needs for debt financing. Then, we lay down ten different debt financing options for short-term and long-term capital needs. Lastly, we tackle the key elements required for successfully executing your financing strategy.
Do you want to know how you can grow your business through short term vs long term capital strategy? Tune in to this episode to learn more!
Here are three reasons why you should listen to the full episode on funding strategy:
Differentiate equity capitalizing versus debt financing.
Learn 10 different short-term and long-term debt financing options.
Discover the things you need to prepare for any type of financing strategy.
Short and Long Term Financing Strategies Resources:
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Choosing a Funding Option to Finance
You need to consider several factors before deciding on how you want to capitalize the business. It depends on why you started the company, where you are at within your business, your future vision, and how fast you want to reach your goal.
One common mistake founders make is mismatching long-term capital needs with short-term debt financing periods and vice versa. To avoid this misstep, determine your capital needs first. Then, match it with the right financing strategy.
Short-Term versus Long-Term Capital Needs
The difference between the two are easy to spot:
Short-term means the cash flow gap or capital need is for less than 12 months. These are typically related to operating or working capital cash flow.
Meanwhile, long-term refers to cash flow gaps or capital needs longer than 12 months. These are usually for investing cash flow.
Equity vs Debt
Before we move on to the funding options, let’s differentiate equity and debt financing.
In equity financing, you sell a percentage of the ownership of your business in exchange for cash from investors. This funding strategy is attractive for those without assets and a consistent cash flow.
On the other hand, debt financing involves borrowing a principal amount from a lender with interest. It allows you to maintain 100% ownership of your business, which is a big benefit. You can employ this funding strategy if you have assets and a steady cash flow.
There is also a type of financing strategy which mixes both equity and debt, called hybrid financing. Stay tuned for Christina’s discussion on this financial strategy soon!
Now, let's go through several short-term capital needs funding options!
Short-Term Needs Option #1: Trade Credit
Trade credit is the credit period extended by suppliers to a business. Suppliers typically give discounts when you pay within the given period. Otherwise, you may need to pay interest for payments made past the due date.
In a cash flow crunch situation, you can consider extending the payment longer and pay extra interest.
Short-Term Needs Option #2: Overdraft
Overdraft financing has the same concept as any bank overdraft facility in your checking account.
If you overextend payment above the agreed limit, the interest gets charged to the extent the amount is used. So, depositing the amount immediately allows you to save on interest costs.
Short-Term Needs Option #3: Revolving Loan
A revolving loan allows you to draw capital up to a predetermined credit limit. Here, you will only pay interest on drawn or outstanding funds.
An example of a revolving loan is an operating line of credit.
Short-Term Needs Option #4: Invoice
Invoice financing allows businesses needing short-term cash injection to get paid immediately. Thus, there’s no need to wait for days to collect customer payments.
There are two forms of invoice financing: invoice factoring and invoice discounting. Both are about gaining advanced cash against unpaid invoices.
The latter is a loan secured against outstanding invoices. In the former, the factoring companies directly purchase the unpaid invoices.
Short-Term Needs Option #5: Purchase Order
Purchase order funding helps companies that have a purchase order on hand from a large client and need to pay their suppliers to fulfill orders.
Short-Term Needs Option #6: Inventory
Inventory financing the business allows owners to leverage their inventory. It frees up funds so that the company can handle growing orders or pay ongoing business expenses.
Short-Term Needs Option #7: Payables
In payables financing, the lender will pay your supplier in cash right upon invoice issuance. You will pay back this amount at a later date.
This financing strategy can apply to trade credit. But only if the interest costs charged by the lender are lower than the late payment costs to the supplier.
You've got the short-term financing options down. But what about your long-term capital needs? Here are three more tips for you:
Long-Term Needs Option #1: Equipment
In equipment financing, you borrow money from a lender to purchase equipment that will serve as collateral. The lender can take the equipment to satisfy the debt in case of failure to repay the amount.
Since a piece of equipment is a long-term asset, it’s better to fund it with long-term debt financing. Using a credit line for this purpose leads to higher financing costs in the longer term.
Long-Term Needs Option #2: Project-Based
Project-based financing works best for long-term capital-intensive projects. Here, the borrower pays the lender back using the cash flow generated from the project.
Long-Term Needs Option #3: IP-Backed
In IP-backed financing, you receive cash from lenders based on the value of your intellectual properties.
Keys to Any Funding Option
No matter which funding strategy you take on, you’ll need to show investors and lenders that your business can grow.
To prove this, you’ll need an executable business plan and proven market demand. Alny financing strategy also requires a revenue-generating business model.
You also need to have sophisticated financial reporting and controls. Lastly, you have to understand the cash flow gap and create a plan for loan repayment.
Why Female Founders are Reluctant to Take On Debt
Female founders often shy away from a debt financing strategy due to three reasons.
One, lack of clarity and plan on how to pay back the debt financing. Two, inadequate knowledge of the different types of debt financing. And three, lack of understanding of cash flow management.
Now, you have a better understanding of how to match your capital needs with your financing options. So, we hope you are more confident to utilize debt for financing the business.
Enjoyed this Episode?
Having a hard time with your financing strategy? Venture capital and equity financing aren’t your only options. With debt financing, you can secure your capital needs without giving away business ownership.
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