There are many types of financing, each with their own costs and benefits. So business owners must assess what kind of capital is right for them. Loans that are secured—that is, that are backed by collateral of some sort—are often the lowest cost. That includes SBA loans and mortgages. Other asset-backed loans, such as factoring or purchase order financing, advance funds based upon your accounts receivable. These types of money lenders may take a really hefty chunk of your receivables, in some cases up to 40 percent, says Kramlich. But the trade-off might be worth it for business owners who need cash quickly. Debt can be valuable, says Kramlich, but sometimes it’s not enough to fuel a growing company. In that case, entrepreneurs may want to consider equity. Equity, or selling shares in your company, can be a great source of long-term capital, she says. That includes investments from friends and family, crowdfunding, angel investors, accelerator programs and venture capitalists. But you will give up some ownership of your company. The outside ownership, or dilution, is typically lowest with friends and family, but increases with angel and venture investors. A hybrid option is to invest in convertible debt, an interest-bearing loan that converts to stock over time. But Kramlich warns entrepreneurs to read the fine print closely and make sure they understand the terms, including how much of their company they are giving up.
This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Winter 2015). Copyright © 2015 BDO USA, LLP. All rights reserved. www.bdo.com
