The worst way to acquire cash is an equity stake. This is when you seek investors to take a permanent chunk of your business in exchange for operating capital. Why is this bad? Wherever you are right now, you're betting your business will be more valuable in the future. In fact, that's what those investors are expecting. Once you take them on, they will be there until you buy them out or you close your doors. Every month I send checks to these guys. It took a lot to get them on board, and a longer than reasonable time for them to see their ROI, but you would have a hard time dislodging them now.
Ironically, equity investors are often the easiest people to convince to give you money when you're starting, since you've got little to offer other types of lenders. If you're just starting out, most will be wanting this to be a professionally structured investment, but in the back of their minds they're probably thinking this is more charity than an investment. It's a great way to get your friends wives to dislike you.
It's your job to prove them all wrong. If you do decide to take them on, spend the first grand of their money to hire a lawyer to craft a shareholder agreement (I waited ten years to do this). This document will explain how to (dynamically) value the business, how to buy out partners, and what happens to shares in cases of divorce and death of investors. You don't want their angry ex wife as your new business partner, she already hates you.
Also, the best investors are silent investors, meaning you own 51%+ of the business and they don't work in it under any circumstances. Keep them away, as it ruins relationships, pierces the corporate veil that protects them and generally leads to arguments and dissolution. Form an LLC or corporation and buy them lunch once a year at your annual shareholder meeting. That's a good degree of contact.
Although I say you should own 51% of the business, consider your business plan to determine if that level of income is enough for you, assuming profits down the road will make up a big chunk of your income. What I see out there are successful businesses with near equal partners, where none of them are capable of earning an income because of how value is divided. They rely on the SWGJ (Spouse With a Good Job) to make ends meet. I'm at 75% and I think that's about as low as I would want to ever go.
The next best way to generate some cash are private lenders. This works best if you're already profitable but have a great plan to generate more income with minimal risk to the business. We did this with our mezzanine expansion project. If you can show you can currently make the loan payments without your plan succeeding, you'll have a much easier time convincing private lenders. Honestly, if you need your plan to succeed to survive, you're better off saving up some additional capital before taking on lenders.
Private lenders will want a Promissory Note and perhaps an additional agreement they'll get their money back. They are high up when it comes to dissolution payments, so they're not in a bad position to start. Some of ours wanted security agreements, with liens on our furniture, fixtures, equipment and inventory. One was crafted as "senior debt" which put it before other loans. Some loans were reduced in interest by offering games at cost for the loan term. All of these loans have me as a personal guarantor of the loan. The goal for us was to take out these loans for a five year term, but pay them off early at our convenience. We're in our second year of loan payments without any missed payments and our sales are up 15%, so it has paid off so far.
Make sure your investors are aware of their new position with any new loan you take out. They are generally last in line when it comes to winding down a business. In the event your business closes, the required order of payouts goes like this:
- Employees (wages, sick and vacation time)
- Government taxes
- Lenders with Senior/Secured Debt
- Other Lenders
- Shareholder loans (something to consider when a shareholder is a lender)
- Shareholders (including you)
Crowd Funding is a way to generate some cash, but it's a poor option for store owners. You can read about my successful Kickstarter in this blog (and in the upcoming book), but it only succeeded because I leveraged industry contacts. In general, a new store has nothing to offer a non existent community of backers. An existing store can sometimes succeed with a Kickstarter with a promise of future services, recognition of goodwill, and various tchotchkes. Our $26K Kickstarter generated about $15K of cash and a whole lot of entitlement for a project that ended up costing $133K. On the plus side, we met most of our private lenders from the Kickstarter project.
There are other methods I write about in the upcoming book, such as community lenders (we got a loan through one, but paid it off before construction began), SBA loans (available to existing businesses or new store owners who own a home), and traditional tricks of the trade, like credit card cash advance checks and the now nearly unobtainable HELOC (Home Equity Line of Credit). The best way, by far, is to be smart and stockpile a bunch of cash.
|From Sperennial Financial|