As highlighted by Rogers in his book, , Entrepreneurial Finance, banks have been the biggest source of capital for entrepreneurs on an annual basis (Rogers, 2020). This has been an important resource for businesses in their efforts to avoid accumulating debt. It should be noted that there are four types of debt. The first two debts, senior debt and subordinated (sub debt), reflect the order of preference that the lender has against the party in debt (Rogers, 2020). The other two types of debt are referred to as short-term, and long-term. Regardless of the categorization, entrepreneurs aim to avoid debt as much as possible. In the event that goal is unobtainable one of the commonly sought-after solutions is debt financing.
As with most things, debt financing presents both pros and cons. Some pros are the cost of capital tends to be low, debt financing provides tax benefits, and the entrepreneur retains complete ownership. Contrastingly, some cons are that payments are due regardless of company profits, and the lender can force the business into bankruptcy (Rogers, 2020). As such, it is important for an entrepreneur to determine if debt financing would truly be beneficial to the business. Especially considering that some of the major sources of debt financing tend to be personal savings, family and friends.
Another tool that an entrepreneur has at their disposal to assess their financial situation is the discounted cash flow (DCF) analysis. The DCF analysis tries to work out the value of a company today, based on projections of how much money it will generate in the future. This is built on the premise that company value is the sum of the cash flows that it produces in the future, discounted to the present at a rate (McClure, (n.d.).
Regardless of the method chosen or resources used to improve the financial situation of a business, the entrepreneur must choose wisely. They also must be proactive. It is important to select the method that best fits the company dynamics and is not simply a quick fix but rather can sustain the test of time.
Hyatt, A. (2016). Crowd start: The ultimate guide to a powerful & profitable crowdfunding campaign. New York: Hunter Cat Press.
McClue, B. (n.d.). Discounted Cash Flow Analysis. Retrieved September 16, 2020, from https://www.investopedia.com/
Rogers, S. (2020). Entrepreneurial finance: Finance and business strategies for the serious entrepreneur (Third ed.). United States: Mcgraw-Hill Education.