What’s your business’s debt-to-equity ratio? Nearly all businesses have a combination of debt and equity. Debt consists of money owed, whereas equity consists of tangible and intangible items of value. A low debt-to-equity ratio shows prospective lenders and investors that your business has minimal debt relative to its assets. As a result, you’ll have an easier time securing financing. Even if your business has a high debt-to-equity ratio, though, there are ways to improve it.
How to Improve Your Business’s Debt-to-Equity Ratio
Start by calculating your business’s debt-to-equity ratio. It uses a simple formula consisting of total liabilities (debt) divided by shareholders’ equity. As long as you know how much debt and equity your business has, you can calculate its debt-to-equity ratio. A debt-to-equity ratio of 2 means that for every $2 of debt your business has, your business has $1 of assets.
Pay Down Debt
You can improve your business’s debt-to-equity ratio by paying down some of its debt. Make debt payments a priority. The more money you pay toward the principle of a loan, for instance, the less debt your business will have. As you pay down your business’s debt, your business will benefit from a lower debt-to-equity ratio.
Negotiate Valuations With Equity Financing
Don’t be afraid to negotiate valuations when seeking equity financing. Equity financing is a form of business financing that involves selling an ownership stake in your business to an investor. The investor, known as a venture capitalist, will typically agree to purchase a percentage of your business for a specific amount of money. By doing so, the venture capitalist will value your business. A low valuation means you’ll have to give up a bigger slice of your business for less money. A higher valuation, on the other hand, means you’ll keep more of your business while getting more money from the venture capitalist.
Debt restructuring can help you achieve a lower debt-to-equity ratio for your business. Debt restructuring is the process of modifying the terms and conditions of existing debt. When you take on new debt, you’ll agree to repay the lender according to various terms of the loan or line or credit. You can restructure new debt, however, to achieve better terms. You may be able to get a lower interest rate, for instance, or you may be able to extend the term of a loan.
This article was brought to you by Intrepid Private Capital Group, a Global Financial Services Company. For more information on startup and business funding, or to complete a funding application, please visit our website.