There are many people I run across today in their 30’s and 40’s who are flocking corporate America to begin their own business venture. The allure and excitement of flexible working schedule, being your own boss, and unlimited upside financial gain are all part of the attraction of making the jump to becoming CEO of your own your company. However, early in the business planning process you’ll be presented with the difficult decisions on how you want to fund the start up (and future growth) of the business. Is it smart to borrow money from friends and family for a loan? Do you go to a bank? Should you use your hard earned savings accounts? Or, potentially give people some sweat equity in the company?
The more difficult decision actually comes when your company has some success. As your top line revenues and profitability grow in the company, you’ll be presented with more challenging decisions on what is the smartest decision on the best financial structure to grow your business. I’ve worked with lots of business owners and own three businesses, so here are some thoughts to consider on capitalizing your business.
- Capitalize Through Cash Flow – When you grow a successful business, you’ll likely set up some type of salary that you take for paying your basic bills. Every month that you have excess profitability, you’ll be presented with the option of taking a shareholder distribution, increasing your business bank account, or using the money to make strategic decisions to grow your business. The conservative part of using your cash flow to grow your business is that you generally won’t overextend yourself. You are essentially only investing the profit you have based upon each month or a reasonable level of predictability of what will happen month to month. The bad part about capitalizing through cash flow is that you can easily stunt your growth or slow your company growth because key decisions, acquisitions, or opportunities that may present themselves to you. Most business owners operate this way with more of a month to month mentality versus a longer term business approach primarily because they were use to earning a paycheck bi-weekly in their old career.
- Capitalize Through Debt – The next option you have is to grow the business through debt. There are several ways to bring on debt in a company, but for most small business owners it will be either through working capital or taking out term note/loans. Remember that working capital is really supposed to be for short term uses of money versus a term note/loan which is supposed to be for a longer term use of money. If you decided to take on additional debt through a term note, then consider how that may affect your monthly cash flow. You should make sure you’ve established a healthy business cash reserve just like you would do personally. Some business owners will look to borrow this money from friends or family, but I don’t recommend that option as it will complicate your business. Establish a good overall total banking relationship with a bank, and look at the types of loans including SBA loans, equipment loans, or regular term notes.
- Capitalize Through Equity – One final way you could grow the company is through equity. If your business has a street value to it at the time you look to grow, you could sell a portion of your company. If you go this route, you should make sure to maintain at least 51% of your company, but realize the moment you bring in other equity partners you’ll have other decisions makers in the business whether you like it or not. You could also look to employees in the company or strategic partners who may also want to own a piece of your business to create additional capital as well. If you need more human resources and less cash, you could offer stock in lieu of the services you will need to grow your business. Many start up business owners make the big mistake of giving up a lot of equity for cash and it can often kill their dream of how they run the business and what direction they want to take it in the future.
Owning a business can be one of the most enjoyable and exciting experiences in a person’s life. There is nothing like being your own boss. If you manage to have some success and make your company profitable, making quality capitalization decisions can be the difference between growth and hyper growth for your business. You should consider either using a board of advisors/directors, using a good business advisor, or staying close with your personal banker so you can surround yourself with people who can assist you through the decision making process. If you approach this in the right manner, you will be able to capitalize on making the smart money moves and building your personal financial wealth.
Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®
Co-CEO and Founder of oXYGen Financial, Inc – The Leaders in Gen X & Y Financial Advice and Services
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