Her CEO Journey™: The Business Finance Podcast for Mission-Driven Women Entrepreneurs

Weekly show where my featured guests and I explore the financial and business challenges women face on the entrepreneurial journey to success. You'll hear them talk about the money side of their businesses in ways you've always wanted to know about, but wouldn't dare ask. They openly share their disappointments, failures, successes, and everything in-between as they grew sales ranging from 6 to 9 figures. Knowing where your business stands financially helps you make critical decisions with confidence. It's simply the best way to be sure you grow a business that fuels the life you want to live.

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episode 135: Her CFO Tips: How To Find Out If Your Business Can Afford Debt Financing [transcript]


As a female founder and CEO, you might think that debt in your business is a bad thing. However, did you know that if you’re running a business, chances are, you likely already have business debt? One form of business debt is paying your suppliers a few days after they send an invoice. Now, this is a type of short-term debt financing strategy. There are many other ways you can leverage business debt finance to build and grow your business. You just need to learn how.

In this episode, I’ll discuss the calculations you need for determining if your business is ready to take on debt as a financing strategy. Debt doesn’t have to be scary. In fact, there’s a wealth of possibilities you can explore if you have the right mindset. So tune in to this episode to learn more!

Episode Highlights

  • [01:35] Business Debt and Debt Financing
  • [03:09] Thinking Like a Lender Tip #1: Debt Service Coverage Ratio
  • [04:36] Thinking Like a Lender Tip #2: Business Debt-to-Income Ratio
  • [05:25] Thinking Like A Lender Tip #3: Assessing Debt Payment
  • [05:49] The Importance of a Financial Forecast
  • [06:51] Making Proactive and Strategic Business Decisions

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Connect With Me

Ready to transform your purpose into an impactful business financial story, profit, and joy? Schedule a chat with me at any time.

Resources

Visit Christina Sjahli’s website for related episodes on the Her CEO Journey™ Podcast.

The Circular Approach: Decreasing Plastic Waste with a Sustainable Business - The Journey of Plaine Product

Changing the Future of Business: Slow Growth and Sound Financial Planning are the Secrets - The Journey of Badger

Understand whether your needs fall under long term debt financing or short term debt financing with the previous episode of Her CFO Tips:

Her CFO Tips: Financing Strategy Based on Short-Term versus Long-Term Capital Needs

Download the Debt Service Coverage Ratio Calculator, so you can see if your business can handle debt! 


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 2021-09-30  9m
 
 
00:00
Taking on debt as a financing
00:00
strategy for your business can
00:03
be a scary thing, especially for
00:03
female founders. We are more
00:08
likely to feel scared about
00:08
taking debt financing maybe
00:12
because we were told that owing
00:12
money is terrible. That's what
00:16
my parents told me. Perhaps your
00:16
upbringing is similar to mine.
00:21
As a result, we think getting a
00:21
loan, getting into debt is
00:25
terrible, especially if we think
00:25
we are going to fail and cannot
00:30
pay it back.
00:32
I get it. This is why I feel
00:32
compelled to curate this solo
00:36
episode on how to assess if your
00:36
business can afford debt
00:40
financing, so you won't feel
00:40
scared and you know, you can pay
00:45
it back.
00:47
You're listening to Her CEO
00:47
Journey, the business finance
00:50
podcast for mission-driven women
00:50
entrepreneurs. I'm your host,
00:54
Christina Sjahli. If you are new
00:54
here, a big warm welcome. If we
01:00
are not connected on LinkedIn,
01:00
please reach out and say hi,
01:03
because that's where I hang out
01:03
and share my business finance
01:07
tips.
01:08
If you have been listening to
01:08
this podcast for a while, and
01:11
you are a regular listener, I
01:11
want you to know, I appreciate
01:15
you. My podcast won't be around
01:15
without your support. This is a
01:20
free weekly show where my guests
01:20
and I want to inspires you to
01:24
balance between mission and
01:24
profit, to create an impact in
01:28
this world, and to achieve
01:28
financial equality through your
01:32
business for good.
01:35
The reality is, if you are
01:35
running a business, you already
01:39
have business debt. Let me give
01:39
you an example. If you purchase
01:43
goods or services from
01:43
suppliers, they send you
01:46
invoices, right? But you don't
01:46
pay them right away. Instead,
01:50
you wait until 15 days, 30 days,
01:50
or even 45 days.
01:54
Technically, during the 15, 30,
01:54
or even 45 days, your business
02:00
owes money to the suppliers.
02:00
That is consider unsecure
02:05
business debt. The difference
02:05
is, in this situation, it is a
02:09
very short-term debt financing
02:09
strategy.
02:13
Business debt finance can be a
02:13
great way to build out your
02:16
company, get valuable capital,
02:16
and invest in areas that can
02:20
lead to overall growth. But it
02:20
is only a good idea to take out
02:24
money when you are taking a
02:24
proactive approach, research and
02:28
plan on the best type of debt
02:28
financing, and understand how
02:32
working capital works.
02:34
We have interviewed of few
02:34
female founders that choose debt
02:38
financing over equity financing.
02:38
Check out the link in the show
02:42
notes to Episode 124 and 126 and
02:42
listen to how these
02:47
mission-driven female founders
02:47
use debt financing to grow their
02:51
businesses.
02:53
So how can you assess if your
02:53
business can afford debt
02:57
financing? Let me show you how
02:57
to think like a lender before
03:02
you even approach a lender.
03:02
Here's how to think like a
03:06
lender.
03:09
Number one, you need to
03:09
calculate the debt service
03:13
coverage ratio, which measures
03:13
the relationship between your
03:17
business income and its debt, if
03:17
you have any debt at this
03:22  moment. It answer the question
Can your business afford to make
03:28
payments on a loan's principal,
03:28
interest and fees?
03:32
Yes. In addition to interest,
03:32
sometimes there are additional
03:37
fees. So you need to be careful.
03:37
You want a debt service coverage
03:42
ratio higher than one, and you
03:42
do not want anything lower than
03:46
one. Because at one, it means
03:46
your business has enough income
03:51
to pay your debt, but there is
03:51
no profit. Your business is only
03:56
at the breakeven point.
03:58
Can your business afford not to
03:58
make any profit? If you don't
04:03
make a profit, you may continue
04:03
in a hamster wheel of getting
04:07
financing again and again. And
04:07
we wouldn't suggest that. It's
04:12
very tiring to go out there over
04:12
and over again to get financing.
04:17
So try to go for a debt service
04:17
coverage ratio of 1.25 or above.
04:24
In order for you to calculate
04:24
the debt service coverage ratio,
04:28
there is a calculator you can
04:28
use, and you can find a link to
04:31
this calculator in the show
04:31
notes.
04:36
The second tool you need to
04:36
think like a lender is another
04:40
calculation. This time you need
04:40
to calculate your business
04:44
debt-to-income ratio. This ratio
04:44
compares the amount of debt
04:48
payment each month to the amount
04:48
of revenue your business
04:51
generate each month.
04:53
For the debt-to-income ratio,
04:53
you want a lower percentage. The
04:58
lower the percentage means you
04:58
can afford to take a new debt
05:01
financing. So try to go for a
05:01
debt-to-income ratio lower than
05:07
36% to be on the safe side.
05:11
Assuming your debt service
05:11
coverage ratio and
05:14
debt-to-income ratio look great
05:14
and seems you can afford this
05:18
new debt financing you are
05:18
considering, what is next in the
05:23
lender's toolbox?
05:25
The third tool in the lender
05:25
toolbox is to assess how you
05:29
plan to repay the debt.
05:29
Remember, paying back the debt
05:33
will cut into your business cash
05:33
flow, and the lender knows this.
05:37
So if you are using the debt to
05:37
solve cashflow problems, they
05:42
want to make sure that this
05:42
loan, this new debt financing
05:46
won't put you worse off in the
05:46
long run.
05:49
This is where financial
05:49
forecasting comes into play. You
05:53
can have all the ratio looks
05:53
great. But without having to put
05:57
the numbers into a forecast, you
05:57
have no way of knowing if you
06:02
can really afford this new debt
06:02
financing. Taking a debt without
06:06
a plan to repay it, how much you
06:06
can actually afford to pay, and
06:10
how does your business looks
06:10
like after take on the debt is a
06:14
dangerous game to play.
06:16
Once you create a forecast, you
06:16
also need to take time to review
06:20
and compare it to the actual
06:20
performance. So if there is any
06:25
indication your business cannot
06:25
afford the debt repayment in the
06:29
future, then you can be
06:29
transparent and communicate it
06:32
right away to the lender.
06:32
Believe it or not, being
06:36
transparent allows the lender to
06:36
figure out a way to help your
06:40
business.
06:41
Creating a forecast but not
06:41
taking the time to review and
06:44
compare it to the actual
06:44
performance? Then really the
06:47
forecast becomes a useless tool.
06:51
We want to make sure you are
06:51
taking proactive and strategic
06:55
business decision. So here are
06:55
some final thoughts to guide
06:59
you.
06:59
Number one, does the business
06:59
debt service coverage ratio is
07:04
1.25 or above?
07:06
Number two, does the business
07:06
debt-to-income ratio is lower
07:10
than 36%?
07:12
Number three, does the business
07:12
have valuable collateral? Or am
07:17
I, as the founder and CEO, ready
07:17
to provide a personal guarantee?
07:22
Number four, would this debt
07:22
financing help to grow your
07:26
business and be a valuable
07:26
return on investment instead of
07:31
putting your business in a
07:31
financially worse off place?
07:35
Number five, does the business
07:35
forecast show clarity the
07:39
business has the ability to pay
07:39
the debt financing back in a
07:43
timely manner?
07:44
Number six, have you compared
07:44
different financing option and
07:48
consider short-term versus
07:48
long-term capital? If you are
07:52
not certain on the differences
07:52
between short-term versus
07:55
long-term capital, go back and
07:55
listen to Episode 134. The link
08:00
to this particular episode is in
08:00
the show notes.
08:03
And number seven, have you taken
08:03
into account the cost of
08:08
financing? For example,
08:08
origination fees, contract fees,
08:13
administration fees, or early
08:13
repayment fees.
08:16
If you are uncertain how much
08:16
debt your business can handle or
08:20
how can you create a forecast to
08:20
include the debt financing
08:24
repayment, we are here to
08:24
support you. We understand what
08:29
you love is to continue
08:29
expanding your business. You
08:32
want to focus on building.
08:32
Forecasting can take time and
08:36
accountability to maintain.
08:36
Connect with us at
08:39
christinasjahli.com/lets-chat.
08:43
And that's bring us to the end
08:43
of another show. Thank you so
08:47
much for listening to another
08:47
episode of Her CEO Journey, the
08:51
business finance podcast for
08:51
women entrepreneurs. If you want
08:55
to create a proactive financial
08:55
plan and process for your
09:00
business so you are ready to
09:00
weather the financial storm over
09:04
the next few months, let's chat
09:04
and see what's possible for you.
09:08
Book in a time to speak with me
09:08
at
09:10
christinasjahli.com/lets-chat.