Financing your business

Money does grow on trees, you just have to pick it—Capital Structuring for Small Businesses

Capital Structuring for Small Businesses. (Part 1 of 3)

Capital Structuring. Sounds scary and complex, doesn't it? After all, you might be thinking, don't we just need money in the bank and everything will be OK? Not if you want to maximize your business's potential. I'm not a fan of personal debt; I do generally lean into the Dave Ramsey camp, but debt properly used in and for a business (note I didn't say for you personally) can unlock great potential for you as a beginning small business owner. In starting my own business, I have a credit line with the bank that allows me some liquidity (ability to pay bills later while making sales now) that I will probably have to dip into in order to finance larger projects or expansion.

Finance Option #1 Debt

This is pretty self-explanatory, but I'll go through the basics. Someone (usually a bank or a credit union) lends you money (a loan) or sets up a line of credit (think credit card). The loan is amortized, (root word meaning "put to death." Pleasant, huh?) or paid back over a certain period of time. You’ll usually have fixed monthly payments that will pay back part interest (the fee the lender charges for their money) and principle (the part of the loan that you're paying back.) In the beginning, the payments are mostly interest, but toward the end, you're paying more on principle than interest and the debt gets smaller faster. Your personal credit score or your business's financial clout determines the interest rate that you'll pay back to the lender.

In contrast, a line of credit just sits there until you borrow money from it, and then the lender calculates the payments you pay based on the amount borrowed. One other financing source you could look at would be borrowing from friends and family. One caution (and the reason I haven’t done this) is that if something goes wrong, all of a sudden Thanksgiving dinner is very awkward or your friend is no longer much of a friend anymore besides all the legal stuff you've had to wade through. I like family at arm’s length. It’s a comfortable distance.

Here are some helpful websites that will help you calculate how much a payment would be for a given time period and interest rate.

If you have more questions on what sort of debt your business can handle, then please talk to your bank, credit union, accountant, or shoot us an email at info@ledgerandpen.com.

There are ways to finance your business other than debt. We'll examine other forms of financing your small business in my next blog posts.