Now and again small businesses need the capital to grow their business. As a small business financial advisor my advice is to explore your balance sheet for any assest owed to you before you venture out to take a loan. yes beacuse loans are not assets and you will end up paying for it. The one major place I will look first is your receivables. How long are the balances been outastanding for? Are they within the agreed terms offered to your customers. Can some of the customers be incentivised with a discount to pay early?
Before you go for a loan look at your options and work out your opportunity cost. Is it cheaper to go for the loan versus asking your clients to pay quickly or even going the factoring route?
For new busineses the question also must be can you start without going for a loan and then use your suppliers money to build up the business. I mean buy on credit collect your money quickly form customers and payup. Reinvest the profit until such time that you are comfortable and don’t need a loan.
When you are certain that going for a loan is the route to go then good. The business owners should know for definite the reasons why they need the loan. Anytime wasted after receipt of loan is a cost to the business. In other words from the time the loan is received it should be earning a return or invested to realise a return in the near future.
In this article we will look at the meaning of capital, suppgestions of some places you can borrow and how this will be accounted for in the books.
Sources of Capital for your small Business
The business cat raise capital from the following sourcxes:
Investors of the bsuiness
Family and friends
Image of capital, share capital capital and loan capital
Share Capital and Loan Capital
What is the difference between share capital on one hand and loan capital on the other.
Traditionally from the banks, now there are all sorts of sources such as:
Loan capital has to be serviced by the payment of interest and the loan also has to be repaid. Payment can be structured for the payee to either pay part of the loan plus interest or pay only the interest any the whole of the loan when the loan is due. This is not a preferred option unless the payee tis certain that the return on investment won’t be due until after a certain period of time and it would be healthy for the business not to pay out the loan until such time. The interst on such loan can be expensive becasue of the high credit risk.
Interest on the loan what ever the profit of the business. Unlike payment of dividends to do with share capital.
There is a contractual obligation to the interest on a loan, for this reason the interest is considered as tax de-ductable, unlike didivdend.
Share capital may be rewarded by payment of Dividends but this will only be paid out (perhaps) when the business makes a profit. Dividends can only be paid out of distributable profits. If there are no distributable profits then any money paid out could be treated as a loan from the business to a Director.
Unlike interest on capital loans, there is no obligation to pay dividends this make it NOT tax deductible and have to be paid out of taxed profits.
Share Capital – Rewarded by didvidends and capital growth
Loan Capital – Serviced by interest and repaid
Dividends – Appropraitions of profit – not tax deductible
Interest – An expense – tax deductible
What to do with the capital
For accountanbility purposes and obvious resaons, this loan should be placed into a company account. If it is a sole trader, the suggestion is to have a saparate account for the business. A separated account will provide the trace and accountanbility for what the capital has been spent on.
As mentioned in earlier paragraph the Business owner should know what the money is for and not mearely to be sitting in the company bank account.
Suppose you were setting up an new ecommerce business or launching a revolutionary product. The obvious expnse will be a userfriendly and customer retention website, the purchase of the products, computer, internet, an office, marketing and advertising. Some of the vitual tools is needed for the operation of the business and not to provide a service in that area or be service provider. These things are fixed in the business. A website is bought or invested into to run the business. It is part of your modern day premises. This is regarded as fixed assets or Capital expenditure due to the amount of money needed to for the expense. The is also considered as a financial cul-de-sac. Sits there are doesn’t move. Instead of charging it as a full expenses, there is a write down charge per year called depreciation, this accrues enough money for a replacement the fixed capital.
What else will the money be spent on:
Expenditure from the loan on the above should be short lived. The business must quicly reach a point where it is making enough money to take care of its own expenses. Using busines capital loan to fund thses expenses is not sustainable. It also has to be noted that in order to make the sales and profit the business needs, it will have to pay for the the staff to serve the customers. Heating and power of provide a conduisive environment to provide the services.
Whether you are a startup or an already established business you may require a business capital to oprate your business. It is important that you do a feasibility analysis and see if you really need the funds.
After deciding that you need the business capital, you have to have a plan in place as what you need the business capital loan for. A simple business Plan with a breakdown of what the business loan will be used for will be great. It will be good practice to compare your actual expense with the plan.
Decide on the source of funds consdering the best deal possible and work out how quickly you can manage the loan and pay off. Consider the likely consequences of your choice. Consider your IFs.
Arrange for the money to be transferred to your business bank account and keep trace of what the funds are used for. Do not keep the moeny in the account without it being invested or not knowing what to do with it.
Above all use the business loan to gerenate sales and uptimately profit for the business. That way you can pay off the loan quickly and be less dependent on loan providers.