Every small business owner needs to understand how to allocate the financial resources of the business in order to maximize the wealth of the business. There are three major decisions which have to be made: which investments to make (capital budgeting), where to get the funds to make the investments (business financing), and how to repay the funds borrowed from equity investors (dividend policy). We can assist you with the middle decision, business financing.
Business Financing is the process of bringing into the business funds from external investors and creditors to invest in profitable projects to grow the business. Funds take the form of either debt or equity.
In debt financing, money is borrowed to be repaid over a fixed period of time, generally with interest. Debt financing may be short-term (repaid in full in less than one year) or long-term (repaid in full in more than one year). The lender derives no ownership interest in the business and the business has no other obligations except full repayment of the loan when due and if funds are available. Personal guarantees are normally required for small businesses and therefore personal credit history becomes very important.
In equity financing, money is exchanged for a share of ownership in the business. So the business raises funds without incurring debt and has no obligation to repay specific sums at specific milestones. The ownership interests of the principals may become diluted and their control can erode especially as additional investors are added. Equity includes common stock and preferred stock.
Equity investors in the business take more business risk than debt investors and may not receive payment until the creditors are repaid and the management of the business decides to distribute funds back to the investors.
Let us help you write a business plan around your financing needs and arrange to get you in front of the right investors.