BMT (Big Match Temperament) is a pre-requisite for entrepreneurship, but when it comes to Financial Decision-Making, insight and research go a long way.
Many entrepreneurs are in need of capital funding to get their business off the ground. Here are things you need to consider in order to make the best choice for your business.
Funding Your Company:
Every business needs funds to operate. There are three ways to inject funds into your business: dipping into your personal savings, borrowing money or getting a funding partner.
1. Putting your own savings in
When putting in your own money, the main consideration is the expected return on the investment.
- Because it is your own money, simply leaving it in the bank can earn five or six per cent interest.
- You can also invest it on the JSE, with a long term expected return of 12-15%.
- But if you take into account the risk of investing the money in your own business as well as the effort of managing it, entrepreneurs generally have an expected return in excess of 25%. You need to be confident that your business can yield a suitable return.
- In almost all cases the answer would be to structure it as a loan. The money you loan to the company can be taken out again without paying any tax thereon, and interest paid is deductible for tax in the company.
- To take out share capital, you will need to declare a dividend at 15% dividends tax, making this a more expensive exercise. You can also not charge any interest on equity invested.
Do you put in the money as equity (share capital) or do you loan it to the company?
2. Borrowing money for the company
The first question here is can the funds be borrowed at a reasonable rate? It is no secret that there is not a long line of unsecured lenders offering loans to young companies.
When investigating taking out a business loan, consider the following:
- What securities are required?
- What are the repayment terms?
- What are the penalty clauses for early repayment?
When a suitable borrower has been found, make sure that the loan is structured as a loan to the company instead of to the owner. This way, interest paid can be deducted for tax purposes.
3. Getting a funding partner
When bringing a funding partner on board, the non-financial implications are the major considerations.
- Will they be actively involved in management of the company, or will they just supply funds for a fixed return?
- Do they have the right personality and skill set for the role they intend on playing?
When taking on a partner, take the time to set up a detailed Memorandum of Incorporation and shareholders agreement stipulating all the details of how your relationships to the company will work. This can save you a lot of pain when it comes to one of you exiting the company.
On the financial side also consider the cost of having them on board – the actual salary or interest to be paid for their involvement with the company, as well as the long term effect of the percentage given up in return for the funds they bring on board.
I hope you have found these insights useful! You can also read my blog on how to take money out of your business once you start turning a profit.
If you want to know more, Outsourced CFO is currently hosting a series of FREE workshops on Leadership in Financial Decision Making. Have a look at http://youtu.be/6dIzmMQPt4E for more info.
If your company scenario is more complex or you need more insight into these, and other, financial issues, feel free to get in touch with Outsourced CFO. We are a financial consulting business tailored to start-ups and SME’s and understand your business financial needs.