Capital Opportunities for Small Businesses - sbtdc

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C A P I T A L O P P O R T U N I T I E S F O R SMA L L B U S I N E S S E S nature of the product or services offered, and market potential will be key factors determining the firm’s ability to raise capital. 12
C A P I T A L O P P O R T U N I T I E S F O R SMA L L B U S I N E S S E S CHAPTER 2: OVERVIEW OF FINANCING RESOURCES Getting Started As a company moves through its life cycle, the sources it uses for capital change. In the early formation phase, capital is generally raised through sources independent of the operations of the organization. Capital is acquired chiefly through the personal resources of the owner or his immediate relations, and investor-related debt. Any cash generated from operations is generally used for setup costs including purchases of inventory and equipment. This initial phase calls for the use of techniques that maximize- or “stretch”- current funds, such as seeking longer credit terms from suppliers, procuring advances from customers, subcontracting, and leasing equipment, among other methods. As the company grows, it begins to generate capital through its operations, and as it establishes a track record of profitability, it will have more opportunities to obtain outside financing. Capital needed for expansion may be available from external sources, including a greater emphasis on debt financing through commercial lenders or equity financing through private investors and firms. As the company matures, operations generally provide cash. Mature companies are in a better position to be able to afford the costs of further expansion through combinations of debt and equity financing, such as private placements or initial public offerings (IPOs). In all of these phases of business growth, companies must keep abreast of the latest tax credits and other government incentives as well as grant opportunities. Though it is far more likely that a business will be able to avoid a tax than obtain “free” grant money, an open mind must be kept toward all sources of potential funding. The organizational form of a business is another factor that determines the financing sources that may be available. A sole proprietorship is often the form used by a small company -- operated by a single individual (e.g. restaurant, trucking firm, gift shop) with few capital needs that cannot be met from the owner's resources or conventional lenders. A start-up formed as a limited partnership (LP) may be attractive to investors who can only be held personally liable up to the amount of their investment made. Neither partnerships nor sole proprietorships, however, can raise equity financing through a private placement or an IPO. Corporations offer greater flexibility for raising capital through a mix of debt and equity than do either sole proprietorships or partnerships. Finally, the limited liability company (LLC) is a fairly new form of organization that combines the characteristics of both corporations and partnerships. 2 Start-Up (or “Seed”) Stage External sources of financing refer to those funds not generated by business operations. During the start-up phase, among the most important sources are personal assets accessible to the owner. The emphasis is on external sources since the business is not yet generating positive cash flow. In the search for early-stage capital, loan opportunities are usually limited by the need for collateral and personal guarantees, which serve as protection to the commercial lender. It is unlikely for most start-up companies to obtain equity investments, in part due to the high risk involved in this stage of investment. Factors such as a well-developed business plan, or 2 For further information on forms of business organization within North Carolina (including forms, filing fees, and useful how-to guides), visit the N.C. Secretary of State’s Corporations webpage: www.secretary.state.nc.us/corporations. 13
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APPENDIX A: QUICK REFERENCE TO SBA
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PROGRAM AMOUNT % GUARANTEE (MAX) US
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