My (our) first business adventure was in 1984 when we, my wife and I, started The Box Office, a video rental business in a small town in western New Jersey. Why video? We were video consumers and traveled twenty miles to the nearest video store. We figured that there must be others in our neighborhood who felt the same lack of convenience.
Where did we get the money to start the business? We borrowed it from ourselves. We had stock certificates and used them as collateral it to finance our Corporation. We bought 250 video tapes, store shelves, accessories and, of course, a cash register.
If you want to start a business or grow you have one, you must have cash.
How to Finance the Cash Needs of Business
No matter how large you business is, if you wish to grow the business, you will need to raise cash. There are various ways of accomplishing this task which include bank loans, private financing, contract financing, selling stock, etc.
Consider this scenario: The sales team secures a large order and customer wants a thousand widgets in two months. Great order, but you don’t have the raw materials to manufacture or the salary dollars to pay employees to perform the labor. Sounds like a dead deal, right?
Not so fast! You can take the contract to a finance company which will pay for the material purchase and the labor needed to fill the order. That company will control the deal, bill your customer and collect their payment. The remainder goes to you. Will your profits be less? Yes, but you have impressed the customer and she may reorder your product at a future date. But, what if the project is so large, you need lots of cash: build a hotel, erect a factory, build a housing development? That’s when you need to find an institution or entity with money to lend, usually a investment bank or commercial lender.
Ways of Financing Growth, New projects
As of this writing, banks have become reluctant to finance small businesses because of stricter Federal banking laws. Therefore, business owners must look to alternative sources not only for growth, but, in some cases, they must borrow cash to maintain the business.
But what if your business will need long term cash. Public Companies raise money through investment bankers using Initial Public Offerings (IPO’s). The Company get cash to grow and the investors get shares of stock. As the Company performs, the stockholders get to vote on company changes and their stocks are trade-able on a stock exchange, where they sell them.
Private Companies or Closely Held Companies are usually owned my a small group of people. These could be members of a family or just a group of individuals who used their private funds to start the company. Private companies usually go to banks for short term needs and business expansion by applying for loans. There are other sources: Angel Investors, Venture Capital Firms, Private Stock Sales.
Private Companies Can Raise Cash without IPO’s
A small private company can sell stock to individual investors which give part of the “ownership” of the company to those individuals. As long as the original owner(s) retains 51% of the stock, the owner remains in sole control of the company decisions. The company uses the cash to accomplish the plan of growing, buying another company or using the money to accomplish another goal of the owners.
The new “owners” of stock can keep the shares, sell them to another private individual or sell them back to the company.Maybe we can help you find a suitor to buy your company or affiliate with a company with complimentary products or services,
As Business Advisors with over 100 years of Corporate America and Small Business experience, we will help you any way you need, including raising Business Capital.
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