In this article:
- Why is cash flow important for business growth?
- At which business stage will you need capital?
- How can personal assets support your business?
- How can you unlock equity in real estate?
- How can you leverage equipment for financing?
- What are the tax implications of unlocking equity?
- What are some common pitfalls to avoid when unlocking equity?
Why is cash flow important for business growth?
Increasingly, costs tied to technology upgrades, cybersecurity and inventory management – combined with delayed payments from clients – are causing a cash crunch for business owners. Factors such as changing interest rates, inflation and global trade uncertainties can further strain cash flow, making it challenging to manage your business finances.
Liquidity is essential for both day-to-day operations and long-term growth:
- Operations: It ensures the stability of your business and means you can meet your financial obligations (payroll, suppliers).
- Scaling: It allows you to invest in tools that support growth and helps you leverage opportunities that drive growth (product launches, acquiring competitors).
- Resilience: It acts as a financial safety net in shaky economic conditions and bolsters your business’s reputation with investors, lenders and suppliers.
At which business stage will you need capital?
Business growth often hinges on having sufficient liquidity. Unlocking equity can offer a smart solution for accessing capital when needed.
- Startups and early-stage businesses: Early on, you’ll need to demonstrate your product’s viability and build your customer base. Personal assets, which have limited equity but a lot of potential, can help. You can also focus on attracting capital from friends, family, and angel investors.
- Growth-stage businesses: Equity will allow you to scale operations and expand your market share. Funding from venture capital, the selling of public shares or selling equity to a larger company are all options at this stage in your business.
- Established businesses: Generating consistent profits and maintaining your position in the market are at the core of your business during this time. Acquiring other businesses to grow your own is one way of unlocking equity; providing loans to your executives against their equity stake is another.
Good to know: A financial advisor can help you find the right liquidity solutions for your business. Through financial analysis and team collaboration, they’ll identify potential solutions such as equipment financing, working capital, and shareholder injection.
How can personal assets support your business?
If business assets aren’t enough, personal assets can sometimes help. For example, a non-registered investment portfolio could be used as collateral for a loan – without needing to sell it and trigger capital gains. That loan could then be invested into the business as a shareholder loan. Other options include using personally owned real estate or even whole life insurance policies as collateral.
There are, however, risks to using personal assets to support your business. It’s important to have a clear repayment plan and long-term strategy – you don’t want to jeopardize your retirement or your ability to exit the business when the time comes.
How can you unlock equity in real estate?
Commercial property owners can leverage their assets to access more equity through refinancing, provided they have sufficient cash flow to manage the added debt. For example, if your building is appraised at $10 million and only $2 million is owed on it, you can leverage the property for additional financing if your business has the necessary cash flow. In capital-intensive industries, equity in real estate can also be used to back capital leases. This can help stretch amortization and ease the burden of high monthly payments.
How can you leverage equipment for financing?
Many businesses don’t realize how much equity they’ve built up in equipment such as trucks, trailers, or specialized machinery. Equipment financing experts can assess the value of these assets and help you refinance or secure new funding, freeing up cash flow.
→ Read this article to learn more about financing a new business venture
What are the tax implications of unlocking equity?
Borrowing against assets can defer or reduce taxes for business owners. Why? Because the proceeds of a loan aren’t considered taxable income. It’s important to remember, however, that you’re simply deferring the tax implications, not eliminating them. If you sell or pass on your asset, you’ll need to pay taxes on its appreciation (capital gains).
What are some common pitfalls to avoid when unlocking equity?
Unlocking equity has its complications and risks. These can include:
- Over-leveraging personal assets: Borrowing more than you can reasonably pay back means even small changes in the market can become major problems for your business. Negative consequences can include a poor credit score, the loss of your assets and even bankruptcy.
- Ignoring repayment planning: Without a structured repayment schedule, you risk missing payments – and potentially damaging your credit score, making it harder to secure loans in the future.
- Not diversifying sources of liquidity: Lack of diversification can leave your business vulnerable to significant losses. If even one investment or strategy doesn’t pan out, it could lead to distressed asset sales.
Unlock your business’s value with professional help.
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