Raising capital isn't always easy. Business expert Barbara Weltman describes some of the options available to small business owners.
Video Transcript
The question of when you need to raise money, should you borrow it or should you bring in an investor? There are both tax and practical differences that you have to take into account. And again, [makes sound] it’s not one better than the other. And you don’t have to choose one over the other. You can combine your financing methods. But when it comes to debt, usually you have to service it immediately, meaning you have to start making repayments, so it’s a drain on your cash flow. In contrast, when you bring in an investor, there’s no obligation to make repayments. So that is better for cash flow purposes. When it comes to taxes, when you borrow money and you repay interest, the interest is deductible. In contrast, when you make distributions to an owner, to an investor you’re not gonna get similar write offs. If your business needs money, you may have personal resources that you can turn to help yourself and help your business. And the question is, thinking about, is this a wise thing to do? For example, you may still have equity in your home, and may be able to take out a home equity loan to use for your business. But then recognize that if you can’t repay, if something happens to the business, you’re putting your home at risk. Similarly, [makes sound] a popular way to finance a business these days is to use money from your qualified retirement plan, and there is a certain structure and a way to do this. It may be a great easy access to cash, but you have to recognize that you’re putting your retirement savings at risk. When you borrow money from family and friends, you have to be really up front about what’s going on with your business. Remember, if things go sour, you’re still gonna have to sit down at the Thanksgiving [laugh] table with these people. So you don’t want to have problems that could be avoided with full disclosure. You do want to make sure that you handle any loan in a formal way, meaning that you’re gonna sign a promissory note, and set interest rates and repayment terms, as you would with any other kind of borrowing. Why? This is protection for the lender. In case the loan goes bad, this will enable your friend or relative to write off the debt.
