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- 1. 15 Small Business Finance: Using Equity, Debt, and Gifts McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Editor's Notes
- Owners put their money where their idea is. It is also a statement to banks and other investors that they believe in themselves and their company enough to risk their own wealth. Other major source are those close to the owner.
- This final source of cash is impersonal. These other sources require documentation such as the budgets created in the previous chapters to convince them to invest. These investors also come with legal reporting requirements which the owner may or may not want to live up to.
- If you are going to finance with equity you will have to estimate your personal worth. Most people underestimate their worth forgetting equity in a car, house, or other non cash assets.
- Lenders need to get more money from their investment in the company than they would at the bank. Otherwise they could put it in a savings account. Your business plan is a good tool here to show them your plans and your professionalism. Most investors want to see growth. You’ll have to show them where you expect it to come from and how you will stimulate it.
- The question, then, is when will it grow. How long will it take. Financing with outside investors is tricky because they now a piece of the business and as such have legal rights which diminish the entrepreneurs authority.
- Loans are available from several sources. Banks are the most obvious. Most larger cities also have the SBA which can help small businesses get started. The SBA also has a list of investment companies willing to help. Many larger colleges also have incubator programs set up to help businesses grow.
- Gift financing seems free but, in reality, it requires, research, reports, and paperwork to obtain. The two sources of gift financing are discussed to further slides.
- Personal gifts are a mixed blessing. Sometimes the receiver may take it as a gift, but after the company becomes successful the family member may not only want repayment, but may want a piece of the company. Misunderstands make Holiday dinners uncomfortable for everyone. To prevent misunderstandings put everything in writing.
- Example Choosing Between Debt and Equity Financing Entrepreneurs would much prefer to raise money in the form of equity rather than debt Why is equity so appealing? it feels like you're getting "free" money during the startup stage usually no repayment obligations and no interest payments due to equity investors have some say in negotiating the price of your stock, any dividend payments and the position the investor will have in your company
- When making to decision to borrow or sell shares it come down to money and control. The higher percentage of shares the owner controls, the more profit and control he has. Most small business owners do not start a business to share it with someone they don’t know.
- Small business owners should celebrate growth. However, during a period of growth more capital is needed to finance the growth. Luckily, investors and lenders are more free with their money due to the growth.