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Business Consulting

5 Things to Consider When Financing a Capital Project

People going over numbers representing capitol project financing

As famed financial journalist B.C. Forbes once said, if you don’t drive your business, you will be driven out of business. This couldn’t be more applicable in today’s business dynamics, as businesses focus on growth and efficiency, and often require financing to help them get where they need to be.

Take technology, for example. Technology is rapidly changing, and given that the majority of businesses had to ramp up their remote working strategy due to the pandemic, technology upgrades suddenly moved to the top of everyone’s list. But projects like this are expensive, and often unforeseen. Sometimes a business will need outside financing to implement a new strategy that will help them grow, but what should they consider before beginning the search for financing?

Here are the 5 things to consider when you’re thinking of financing your next capital project:

1. Have a Financial Plan

Allen Lakein has said, “Failing to plan is planning to fail.” Designing a comprehensive and well-reasoned financial plan is one of the most crucial things you can do as a growing business. Setting and keeping track of your goals is what keeps you in line, and gives you a point of comparison as you track your business’s growth over time. A good financial plan provides a ground for your business’ success, helping you avoid pitfalls as you plan your financial success on a timeline, be it in a budget form or in a report form.

It is good practice to have the financial plan prepared and reviewed on an annual basis, and it should contain quarterly goals. Setting up a meeting with your accountant/business consultant is an excellent place to start. They can help you understand where you are currently, where you want to go and help you find ways to get there more quickly.

2. Invest in Assets With Staying Power

After you’ve set up a plan, your accountant will likely tell you that it is best to invest in an asset that can last you a long time and provide optimal amortization. The longer the life of the asset, the better your economies of scale.

A competent business consultant can help you figure out which assets are most pertinent to carrying out your business strategy, providing you with a list of assets worth investing in, and their corresponding return on investment. It is just as important to know exactly how much money you need for your project or equipment and how much income it can help generate for your business.

3. Find the Right Lender

When you’ve figured out how much capital your project requires, it’s time to find the right financial partner or commercial banker to help finance your project. The first call will likely be to your main bank, where you hold your business’ accounts or may even have a line of credit. Discuss with your banker whether they can increase your line of credit or offer you a specialized product.

If your bank cannot offer you a workable solution, this is no cause for concern. There are many commercial bankers and financial capital financiers who are willing to take a look at deals of different sizes. The key here is to work with your business consultant; they usually have a network of very strong financial partners. Furthermore, a competent business consultant is often aware of several specialized products offered by various financiers, including banks and independent shops. In addition, you could ask business peers and partners for referrals to reputable commercial lenders.

4. Understand the Loan and its Terms

You may discover that the best way to move ahead is to take out a capital loan. Once you are ready to take this step, it’s important to understand the following key items. When we say ‘understand’ we mean compare and evaluate the term sheets that will be provided to you by the various financiers you speak with. Make sure to take these term sheets to your business consultant and/or accountant to understand the differences in below listed key items of the financing agreement:

  1. Principal: The amount you borrow from a bank or lender which you agree to pay back.
  2. Interest Rate: The cost charged by the financier in addition to the principal amount.
  3. Terms: The terms of the agreement, including repayment schedules and penalties, vary from financier to financier and should be examined closely.
  4. Security: Banks will take a lot of security in order to protect their capital. You need to be aware of any risk involved before you sign on the dotted line.

Familiarity with the above terms will help you understand which financial partner is best for you. You need to know exactly how much it will cost to borrow, and how much you are sacrificing for the loan (including in the event of default). It is important to keep in mind the original amount you plan to borrow, because the purpose of the loan is to help your business grow, not take you into more debt.

5. Use Your Connections

While we have already touched on this slightly, it is worth discussing in detail: use your business network. When you have a capital project, consider evaluating whether it could be done as a joint venture with one of your customers or suppliers. Depending on the situation, if your project may benefit your customer or supplier in a way that can provide a solid return on investment for both parties, then it could be a good idea to team up on a project. Furthermore, financing the project may become easier if you are splitting the risk, be it obtaining a loan or applying for a government grant.

Your accountant can help you plan out the proposal and run the necessary numbers.

Contact Sloan Partners LLP for Corporate Financing Advice & Strategy

Growth is a crucial topic for any business and it’s a tough one to plan. On one hand, you want to take some calculated risks and be creative in decision-making, while on the other, you need to make sure you don’t lose sight of what’s important. It’s always best to discuss your business growth, strategy, and financial planning with a professional who has your company’s best interests in mind.

At Sloan Partners LLP, we offer a team of skilled and exceptionally experienced Chartered Professional Accountants who provide our small and large business clients with a full range of services, including business consulting and financing. No matter your company’s specific needs, we can help. Let us keep an eye on the details so you can focus on the big picture. To schedule a consultation with one of our exceptionally knowledgeable accounting professionals, please reach out to us online or call us at 416-665-7735.

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