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What factors should I consider when evaluating sources of capital?


The most important lesson when looking for capital and credit for a business is to understand that all money is NOT created equal. As you look at sources of capital for your business you need to consider:

  • 1. Debt/Equity – Any capital that you receive is either going to be debt or equity. Equity requires a business owner to give up ownership in their company. Debt does not require giving up ownership in the majority of cases. You need to be clear on what type of money you are obtaining. For the most part, banks and businesses deal with debt, and investors deal with equity. Equity gives the investor a percentage of future profits. So while it may feel like free money, this is the most expensive capital you can get for your business (if you are successful!).
  • 2. Control – Does the money reduce your control? Bringing on investors or partners will lessen your control. A lender may request financial oversight or independent audits. You need to be aware of what you are giving up.
  • 3. Security – How is the lender or investor securing the money? Are you personally guaranteeing it? Is there a blanket lien on your assets? If you default who are they going after for repayment?
  • 4. Transferability – Can you transfer the capital to the next business owner? In other words, is the capital for you or is it for the business? It won't do you much good to sell a business if all the working capital is still tied to you.
  • 5. Ease of Attainment – How easy is it to get? How much time will you need to invest in order to secure the capital that you need?
  • 6. Team – Are you adding players to your team that are invested in your success? Sometimes bringing on investors and surrendering control is exactly what you need to do and in other cases is the furthest from where your business needs to be.
Written by:
David Gass, President & Founder
Business Credit Services, Inc.

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