Many of us need money from other people to start and grow companies. The money comes from banks, partners, investors, venture capitalists, equity funds…and/or our closest friends and family. No matter what the source is, understand two things. One, there is always a cost to using someone else’s money. Two, the cost can vary greatly between sources.
The first question is…Do I borrow money and go into debt or do I sell equity in my company to someone else? Keep in mind that equity is always more expensive than debt. You only have to pay-off debt one time. The payments on equity can last the entire life of your company. I have seen more than one person sell his or her company only to realize just how expensive equity can be. One example, my friend (a very smart guy) started his company and gave away a 20% equity stake in exchange for $50,000 of start-up capital. Over approximately 10 years, this 20% partner received 20% of all of the company profits and $5,200,000 when the company was sold. If he paid interest of 50% a year on the $50,000, his total repayment would have been $300,000.
When it comes to growing a successful early education company, responsible use of debt can be great tool to expedite that growth. Here are some important things to consider when you’re thinking about using debt.
1. Never accept a loan from any lender (including your favorite lender) without having many lenders compete for your loan. No matter how you approach the process, competition amongst vendors is always in the best interest of the consumer.
2. When you see the loan that you think is right for you, do a detailed review (this means use a good attorney) to make sure there are no hidden fees or terms…no ambiguous language that can surprise you after you have already made the commitment. Some people think it’s overkill, but it’s not. Many banks and bankers (like car salesman) take an approach that the paperwork is all just standard stuff…sign here …sign here. It’s standard stuff because they’re not the ones on hook. Review the loan documents carefully.
3. Be transparent with your lender. There’s nothing wrong with negotiating the best terms you can get, but don’t hide anything. Be honest and be direct.
4. If you can, see how the lender works with their borrowers when things aren’t going well. Everyone is friendly the day you sign the papers, but I have seen lenders become absolutely vicious when they’re getting tested. Never in recent history was that more apparent than in the financial system crash of 2008. You want a lender that will work with you just in case everything doesn’t go as planned.
As always, we hope it helps.
Best to you….
Brad R. Barnett, President BFS®
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