Capital Structuring for Small Businesses (Part 2 of 3)

In my last post, I said there were several ways of financing your small business. I described how debt works in very basic terms. If you want more specifics on what sort of debt load your business can handle, you should talk your bank, credit union, or accountant to get some ideas on what exactly you're looking at.

Finance Option #2 Stock

The second flavor of financing your small business would be getting outside investors to give money to your business. To give you an idea what this looks like, just go watch the show "Shark Tank." The show's about small business owners and inventors who have an existing business or have some new invention that they need capital to be able to expand operations or start production. Some of the questions that the investor board asks may be some of the questions that you'll face when pitching your business. I will be honest, I haven't gone this route, because I want to have control over my business and how it operates. I don't want someone else telling my how my business is going to be run, or potentially edging me out of it. That being said, the three most important things in accounting and business are document, document, document! If you get an outside investor, make sure you clearly line out who does what and who has what rights over operations, business decisions, etc. Is the investor a "silent partner" meaning they don't have anything to do with the day-to-day operations and only worry about getting a cut of the business profits? What sort of reporting does the investor require? You definitely need to communicate those needs with your accountant, and if you don't have an accountant, get one! I say this, because when tax time comes, both you and your investor will be very interested in the forms that are filed with federal and state tax authorities.

From a very fundamental standpoint, outside investment may be necessary in the short-term. You also need to take the long-term effects into account as well. Generally, in accepting someone's financial backing, you'll be giving up a percentage of the business's profits. Make sure you take that cost into account as well.

For some of the same reasons I described in my last post, I have avoided having a family member as an investor just because I don’t want the potential fallout from something going wrong. I’d rather not thanks.

All these are important considerations to take into account when forming your small business, and determining the risk/return relationship in financing your business. In the next blog post, we'll discuss bootstrapping your business finances.