Capitalizing Your Small Business

Small business needs money. It’s needed to do things like buy equipment, fund growth and provide reserves for the inevitable rainy day.

 

As the CEO of your small business, it’s your job to make sure you have enough capital to fulfill the requirements of your business. Most small businesses are service-oriented businesses, which means they don’t need much capital to get started. Many start by offering a service and then use the cash from their business to pay their salary. If you intended on being a lone ranger, such as a small insurance agent, then this model will work well for you.

 

But if you intend on growing your business such that you have employees, plant and/or equipment, then read on – you’ll need to consider what you’re doing.

The Three Kinds Of Capital

There are three kinds of capital:

  • Investment Capital: This is money that you or someone else puts into the business. It’s like buying stock in a publicly traded firm, except for one thing: When you make an investment in a small, closely held corporation, there is no after-market for your shares. Therefore, you typically won’t get your invested capital out until you sell the company.
  • Retained Earnings: This is the profit your company has made that you left in the business beyond your salary or other compensation items. This is the best kind of capital, because your business got it the old fashioned way — it earned it. Your banker will like seeing retained earnings on your balance sheet, perhaps even more than investment capital, because it says two things: 1) Your company had the ability to produce retained earnings by operating profitably; 2) As the owner, you had the discipline to leave this capital in the company instead of distributing it.
  • Borrowed Funds: This is what you think it is: debt. Debt is not only an excellent way to capitalize your company, it is also the worst way to capitalize it if you borrow too much or improperly manage it. Debt can be a wonderful bridge between periods of high cash, but it is a killer for businesses with weak incomes.

Determine How Much Capital You’ll Need

A good cash flow projection will help you determine how much money you’ll need and when. Simply enter when cash is going in and when it’s going out on a weekly basis. (We have a cash flow spreadsheet tool that you can download). When you have negative numbers at the bottom of the column in a given week, this is the amount of capital you’ll need to run your business.

Spend your capital on that which will result in more income. With interest rates so low, you should borrow money for hard, large investments and do as much as you can to keep your fixed overhead as inexpensive as possible. Don’t sign contracts or rent office space or anything else like this until you’re forced to do so. Spend your scarce resources on revenue-generating activities.

If you need large sums of capital, be prepared to give away most of your ownership – at least for a period of time in exchange for the loss of ownership.

A Biblical View of Capital

While the Bible doesn’t speak to capital directly, there are two observations that can be gleaned from Scripture and applied to the use of capital. First, God always funds that which He calls us to, so if God has called you to business, you can be sure that whatever risks He is asking you to assume are also shouldered by Him. But it is prudent to keep those risks as small as possible, so, this leads to my second observation: Be very reluctant to use debt to cash flow your business. The more debt you have, the more you are a servant to the lender, not to God. So staying out of debt for your business is essential to having a good chance at succeeding in the long run.

In addition, I would advise you to tithe a portion of your profits out of your business, even if you business only earns $1000/year and you give away $100. It is a practice that will keep your heart in the right place and will honor God in what you’re doing.

Bill English, CEO
Elevate

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