|
 Translate Into YOUR Dialect Today's Feature Article
58 Ways To Save Money For Your Business
There are two kinds of capital: debt and equity. Both kinds are
typically used by a company during its lifetime. Lenders have
different objectives than investors and therefore look at
different factors about a company when deciding whether or not
to invest or make a loan.
Debt
Debt is money borrowed, which must be repaid at a set time
period and generates income for the lender over that time period.
Lending sources include not only banks, but also leasing
companies, factoring companies and even individuals.
Lending sources look primarily at two factors: how risky the
loan is; and whether the company can generate sufficient cash to
pay the interest and repay the principal. The growth potential
of the company is secondary; the primary considerations are the
track record and asset base of the company. Usually the debt
must be secured against the assets of the company and very
commonly must also be secured against the assets of the owner of
the company, also called a personal guarantee.
Assets of the company are not usually given full book value in
securing a loan. In other words, if your inventory has a book
value of $50,000 (or it cost you $50,000 to produce that
inventory) a lending source will only give you 50% to 75% of
that value. The reason being is that the lending source is not
in your business and would have to quickly liquidate the
inventory, rather than selling it at market prices.
Accounts receivable, or money that is owed to you from customers
who have previously purchased your product but not paid for it
yet, are also discounted. Using the same example, $50,000 worth
of accounts receivable may only be worth 60% to 70% of that
value to the lending source. Customers may not pay the full
amount owed, or feel they have to pay for the product at all, if
an outside lending source is demanding payment. And so on.…with
equipment, land, buildings, furniture, fixtures and what ever
other assets the company has, the same general rule applies.
The lender often requests that the personal assets of the owner
of the company are pledged as a contingency and as a gesture of
faith by the owner. Obviously, if the owner of the company does
not believe in his/her own company's ability to repay the loan,
why should the lending source?
Equity
Equity capital is money given for a share of ownership of the
company. Equity can be provided by individual investors,
sometimes known as "angels", venture capital companies, joint
venture partners, and the sweat equity and capital contribution
of the founders of the company. Equity providers are more
interested in the growth potential of the company. Their
objective is to invest an amount now and reap the rewards of a 5
to 1, or even 10 to 1, payoff in three to five years. In other
words $100,000 now will be worth $1,000,000 in three years if
invested in the right company.
Since the objectives of investors are different from lenders,
the factors they evaluate in determining whether to invest are
different from lending sources. Investors like to put money in
companies that have the potential for rapid growth. Growth
potential is based on the quality of management of the company,
product brand strength, barriers of entry to competitors and
size of the market for the product.
So Debt Or Equity Capital?
The answer is dependent on the answers to several questions: Why
does the company require additional capital? What stage is the
company at? What is the financial condition of the company? How
much capital is required? What constraints will the financing
source put on the day-to-day operations of the company? And
finally, what impact will the financing source have on the
ownership of the company?
********************************
Now there is a concise digest presenting 58 sources of financing,
to guide you on a sure-footed path to finding capital to grow
your business: 58 Ways To Save Money For Your Business. You can
get it here:
This time like all times is a very good one if we but know what to do with it.
Ralph Waldo Emerson
Get one of the Feature Ads in our Ezine: If you like our Ezine, please recommend it to a friend!
Home Site Map Tell Friends Web Lions Privacy Policy Contact Us |
