| Businesses that are growing require sources of | | | | debt, at which point cash flow becomes a potential |
| capital. The capital in a company of course comes | | | | problem if the company is over leveraged. |
| from the owner or borrowed funds. Generally | | | | Currently rates are very low for businesses that |
| speaking business owners prefer to borrow rather | | | | have access to capital. Therefore in many cases it |
| than sell equity in the company, as that sale of equity | | | | might make sense to lock into longer term loans in |
| dilutes the ownership position, i.e. they own less of | | | | the current attractive rate environment. |
| the pie! New equity can come from friends and | | | | When the business owner has made the decision to |
| family, venture capital firms, and angel investors. | | | | purse business loans the old Boy Scout model works |
| These parties are looking for good management, | | | | very well - BE PREAPRED! Business owners that do |
| integrity, owner financial stake, and growth potential. | | | | their homework will usually be successful. Lets not |
| However, in the current difficult financial environment | | | | forget the banks and finance firms are actually in |
| many lenders are in fact insisting that business | | | | business to loan funds. Naturally collateral, or additional |
| owners put more of their own money into the | | | | collateral certainly improves the chances of debt |
| company. There is never an easy answer when it | | | | financing success and loan approval. |
| comes to the debt or equity question. | | | | Debt and equity financing as a sources of capital |
| When businesses borrow funds there is a cost to | | | | should be used for the right reasons - expansion, |
| that capital - as interest on that debt reduces over-all | | | | seasonality of business, increased inventory and |
| profits. New equity in the company of course does | | | | working capital that will increase sales. Funds that |
| not reduce those earnings, however the profits are | | | | need to address business inadequacies such as poor |
| distributed more widely and the earnings are | | | | management, financial losses, falling sales, etc are |
| proportionately reduced. | | | | very difficult to come by! |
| Borrowing funds of course comes with risk, as those | | | | In summary, business owners should carefully |
| loans must be repaid. Business owners sometimes | | | | consider the positive and negative effects of |
| get caught in the trap of financing long term projects | | | | additional debt or equity capital. Once they have |
| with short term money - they are therefore at the | | | | made an informed decision, either on their own or |
| mercy of having to always roll over that debt, and | | | | with a trusted business advisor they should consider |
| potentially also seeing rates go up, sometimes | | | | the cost of that capital and how it is best achieved. |
| dramatically. Also, a business can carry only so much | | | | |