Accessing Capital

July 8, 2010, 12:00 am

Small Business Finance & Profitability

By William Stong

For any business, there are two ways to obtain capital:

● Borrow the money (e.g., loans)

● Sell ownership stakes (i.e., share in equity)

Loans are provided by entities that have capital they are looking to invest and who, when they look at your company, see, and believe in, a clear source of repayment. Early qualifiers for commercial lending are credit ratings and past history of a business’s ability to consistently generate profit.

Equity investments in a business are driven by investors who see, and believe in, the ultimate market success of a product or service and believe that the owners/management team have the skills, experience, and dedication to achieve that success.

In both cases, small businesses have distinct disadvantages:

● May lack a long history of profitable success

● Business model may only deliver small profits

● Creditworthiness may not yet be established

● Much larger competitors may exist in the same market

Bottomline is that these sources of capital may be scarce. If, therefore, your small business is funded by money from your savings or from friends and family, decide which type of capital it is. Ultimately it makes a difference to both sides:

With a positive outcome (e.g., successful profitability growth)

1. Loan

- means your business will pay the money back plus an agreed upon interest amount

- people who advanced the funds eventually receive principal and earnings

2. Equity

- means your business will give the investor a pro-rata share of any money taken out of the business (e.g., dividends, sale of the business)

With a negative outcome (e.g., goes out of business)

1. Loan

- the severity of the bankruptcy will determine how much, if any, of the original loan will be repaid. Usually, creditors receive some fraction of their money back.

2. Equity

- again, the severity of the bankruptcy will determine how much, if any, of the original investment will be received. Equity holders, however, receive no money until all creditors are paid. Thus, if creditors usually only receive a fraction of their loans back, equity investors will receive nothing.

Bill

William A. Stong

Email: william.a.stong@gmail.com

SBF&P # 70

Telephone: 925-202-6244