The first question you must answer is this: What “kind” of money are you looking for? Is it debt or equity? I always let the business decide!
First of all, let me show you the process which allows you to decide. Remember, in my world the business is a separate “persona” (legal entity) and it has the capacity to “tell” me exactly the “kind” of money it needs: I don’t just wake up and say “I need a loan from a bank,” or “I need investors.”
It’s the business that “tells” me the “kind” (type) of money it needs.
Let the business “talk”?! Yes, let the business tell you what it needs.
So let’s ask: “Hey, my Business what kind of money do you need?”
Answer (from the Business): “Owner, what does the business plan say?”
This is why we develop a business plan! When done properly, it tells you exactly how much money you need, as the business grows, and it tells you the “kind” of money you need.
__It is the business plan that should tell you whether you need debt or equity.
Debt vs equity financing is one of the most important decisions you will make in your business. (Please take note: I am not going to tell you which choice to make in this Control vs Growth series. I am just going to share my own experiences. You must make your own decisions).
For example, debt allows you to keep control, but it’s not always good for the business itself. Can you tell me some of the pros and cons, advantages and disadvantages, of financing your business with debt?
Do you understand, for instance, how interest rates work? How about “compounding”? If you’re in the Senior Class, I am sure you do, but if you don’t… beware. “Crunch” (analyse) these numbers with care! (You can be sure the bankers and investors are!)
Being turned down by a bank can actually be a blessing in disguise because you could end up bankrupt, or worse, if you get a loan (debt) that you should never have taken in the first place!
__Understanding what “kind” of money you need, debt or equity, is the first thing a serious entrepreneur tries to establish very quickly using the business plan.
Never, ever, outsource the development of a business plan! Yes, so many people think preparing a business plan is something done by an accountant friend to help you apply for a bank loan!
No sir (ma’am)!
Now if the business (through the business plan) has “told” you it will not grow using bank loans or money borrowed from friends, what are you going to do?
Business to Owner: “I want equity capital!”
Time to go to Shark Tank?
To be continued. . .