Diversification is a risk management technique to reduce volatility, produce stable returns and deliver a higher net benefit.
A diversified capital pool will have a cost that lies between single source debt capital and opportunity cost. The opportunity cost is the lost revenue from being unable to operate due to a lack of capital. Most small business owners are wired to go after the lowest cost of capital, however you cannot ignore the opportunity cost of locking into a single source.
Let’s say bank financing is an option for all small business owners and it is the lowest cost form of financing. For the bank to manage its risk and continue to supply low cost financing it must deploy a few tactics. These include total exposure limits, low loan-to-value ratios, covenants, general security agreements and reporting requirements with annual reviews as well as the right to demand payment in full. These tactics (or conditions) are restrictions on your business. What do you do when the capital you acquired to operate is now the obstacle to the business thriving maybe even surviving?
When things suddenly change, for better or worse, like a sustained drop in oil prices, change in cross boarder trade agreements, or winning a large contract, restrictions are just that but on the operation of your business. The conditions acceptable in stable and prosperous times are now threatening the control of your business and maybe its survival.
What strategy do you employ to counter the influence of your banker over your business?
Diversify your debt. Use multiple sources and types of financing to get what your business needs without giving up control. Use the most appropriate form and source of capital for what the business needs providing the greatest amount of flexibility.
Benefits of expanding your sources of capital include:
- Non-Demand Financing
- More control of how to use your equity
- Higher Loan to Values
- Flexible terms and structures including no pay periods, skip pays and interest only
- Experience with more lenders therefore more options
- Payments aligned with cash flows to reduce cash flow issues
- Greatly reduced conditions, restrictions and covenants
- Higher combined borrowing limits
Patron West has access to a network of lenders that include leasing companies, private debt, bridge financing, asset based lenders as well as banks and credit unions. We have over 20 years of experience working with business owners like you and the financing partners you need. We’ve helped thousands of businesses diversify their debt and reduce their risk of lost opportunity.
We haven’t seen or heard it all yet so call or connect with us, we’d like to hear your story. Our success comes from your business achieving its own.
