Because starting a business requires money, one of the first things any entrepreneur needs to think about is where to get capital. Most business owners can’t fund a business out of pocket for long and must choose between debt (loans or other borrowing) or equity (selling a percentage of ownership or taking on a partner) to get the rest of what’s needed. Each has advantages and disadvantages which are important to know before you take on either.
Borrowing money has advantages, mainly that it doesn’t dilute the ownership of the company. Many of the uninitiated believe loans from banks or the SBA are an easy source of funding but eventually find out how much work it can be to borrow money and how difficult it can be to qualify.
Others think they can take on investors but may not realize how complicated it can be and how substantial risks can be if not done properly. Many don’t understand where SEC regulations and rules regarding accredited investors will impact them much less consider the impact that additional owners will have on accounting and taxes. Not only will these rules and regulations impact the business, but they will also greatly affect investors.
In many cases, smaller companies approach family and friends to either loan money or invest without realizing that the same rules apply. While family and friends tend to be more forgiving than banks, they may be less so if they realize that they may be required to pay additional taxes. They may also not have much sympathy if the company fails and they don’t get paid back.
Those who have started their own businesses know that the need for additional capital never really ends, not even after you’ve started selling or even profiting. Though the needs vary based on the type and scale of the business, growth always comes with a cost.
Before taking any money or making any agreement regarding a loan to or investment in your business, it is best to speak to someone who has been there before and seen how others have done it. If you can speak to someone who’s seen it done both right and wrong, even better. Brightleaf Consulting Group has spent a decade helping clients understand the funding process so they can avoid making mistakes that can cost them more later.
Do you have questions about finding money to start or expand your business? Contact Brightleaf and let us help you.
- John Thrush