What criteria should I consider to determine whether a loan or cash infusion would be better for growing my business?
I run a small beekeeping and honey production business, producing and selling raw honey at farmers markets. My question is regarding growing to the next level. I have been running the business "on a shoestring" (only cash flow) for 13 years with 100-150 beehives.
I want to know what criteria should I consider to determine whether a loan or cash infusion would be a good decision to grow the size of the business (double it)? For instance, should I get a loan to purchase more beehives which would provide greater honey production and possibly other revenue streams such as paid pollination services? The debt servicing would be a little tricky because (like farming) it will require a whole season (spring and summer) to produce the honey crop to provide income for the loan repayment. The current cash flow would not be able to provide the loan repayment. A beehive to purchase costs $150-$250 times and 150 new hives = $22,500 (about $400/mo. for 5 years).
Aunt Willies Apiary
When you sell equity in your business you are taking on a partner. The first question you should ask yourself is "Do I want a partner, and how much of my company am I willing to give up to this partner in order to get the cash I want? Other questions include: will my partner own a majority share, will I own a majority share, or will we be 50/50 partners? What skill set does this partner bring to my business? What role will this partner play in the business after the investment? Will this partner be a silent partner bringing only capital to the business? There are a lot of questions you must answer, before you can decide which route is better for your situation. It is inappropriate to recommend any financing scenario until you answer these questions. Anyone investing in your business, partner or bank, will want to see a well thought out business plan.
First, you'll need a business or strategic plan that describes how much and how you will get revenue that merits 3rd party funding via a loan or cash infusion (also a loan of sorts). Alternatively, your type of business might resonate with a crowd-funding platform (Kickstarter, etc.), BUT you'll still need a strategic plan that answers the same questions in order to optimize your likelihood for success.
I'd vote for loan. A cash infusion probably means giving up a % of your company to a private investor?? Even a silent partner can have opinions differing from yours. Based on past experience create a Sales Forecast and Cash Flow by the month for at least the next two years - three is better. The bottom line of cash flow is magic and will help you decide. Due to the income/profit delay, you may have to borrow enough extra to make loan pymts until you start selling/bringing in deposits. Remember a Cash Flow estimate indicates what your company ckbk may look like - but will differ because you will sell more or less and spend more or less than forecast.