October 9, 2013 Leave a comment
When does a business need investors?
Some would say, “as soon as the business is created!” For many startup businesses this may be true. All businesses face the need for money. Unfortunately for a new business, cash from others is not always available. Most lenders require the business be in operation for a year or two. The bank wants to see tax returns for two years of revenue before lending money. Unless there is some spectacular innovation or opportunity, investors and lenders usually steer clear of startup initiatives. The owner’s family and friends, as well as personal credit cards, are often the usual source of cash.
Some businesses have seasonal revenue flow. Cash is not as available in some months of the year but it is more steady or available at other times of the year. This seasonal down turn in revenues must be managed by setting aside monies during the revenue rich months to cover operating costs in low revenue months. A seasonal business must monitor business purchases to assure there is adequate revenue to pay for the purchases.
Many seasonal businesses use a line of credit with their banker to cushion or off set the low revenue months. Obtaining a line of credit gives a business access to cash when needed up to a certain amount without having to go through a loan review every time money is needed.
There is an initial qualifying process to obtain a line of credit, but once approved and the business follows the pay back guidelines, a business can rely on that line of credit from year to year to provide needed cash. A business can also increase the line of credit as the business grows and shows its ability to pay back the increased line of credit. Not all banks provide this service.
A growing business often needs additional cash to meet the demands of increased levels of operating costs. The revenue from the growth may not be available as quickly as the need to pay for operating costs. Raw materials are purchased to manufacture increased levels of product. Staff is hired to administer additional processes or services. The physical plant needs to be expanded to accommodate increased production or inventory space. This is when a loan is a way to finance the increased growth. The terms of the loan; interest rate, length or term of the payback period and amount of money borrowed, all play a role in the owner’s ability to obtain a loan. Collateral is often required by the lender as protection for the loan.
None of the money transactions discussed above creates business investors. In today’s business climate an investor may be interested in obtaining a percent of ownership, a per cent of the profit, some right to the product or service or a combination of all of these.
If a business is a corporation with stock, the owners are considered first investors. This same corporation can recruit other individuals to invest in the business. These new investors may have no involvement with the running of the business or the investment does bring the opportunity to have a say in the running of the business. Either way there are now additional stock holders with rights that should be stated in the minutes of a business meeting.
As a business becomes more successful, has larger market share, gains a national or international presence, it might consider being listed on a stock exchange or NASDAQ. This step requires compliance with Security and Exchange guidelines and the use of a qualified attorney. The investors are potentially from around the globe. The company’s stock is measured by dollar multiples.
When is an investor needed? When the business owner decides to seek financial assistance from beyond the traditional banking resources an investor relationship is usually created.
Today’s cyber world has created a new way for a business to obtain financial support. Gaining acceptance on a Kickstart model website a business obtains financial support from individuals from around the world for a few dollars per interested person. This is the new definition of “investor”.
C Moynihan 10/2013