How to Write a Business Plan

ChApter 4 | POTENTIAL SOURCES OF MONEY TO START OR ExPAND YOUR SMALL BUSINESS | 59

• Loan advantages. The lender has no
  profit participation or management say
  in your business. Your only obligation
  is to repay the loan on time. Interest
  payments (not principal payments) are
  a deductible business expense. Loans
  from close friends or relatives can have
  flexible repayment terms.


• Loan disadvantages. You may have to
  make loan repayments when your
  need for cash is greatest, such as
  during your business’s start-up or
  expansion. Also, you may have to
  assign a security interest in your
  property to obtain a loan, thereby
  placing personal assets at risk. Under
  most circumstances you can be sued
  personally for any unpaid balance of
  the loan, even if it’s unsecured.


• Equity investment advantages. You
  can be flexible about repayment
  require ments. Investors sometimes
  are partners and often offer valuable
  advice and assistance. If your business
  loses money or goes broke, you
  probably won’t have to repay your
  investors.


• Equity investment disadvantages. Equity
  investors require a larger share of the
  profits. Your shareholders and partners
  have a legal right to be informed about
  all significant business events and a
  right to ethical management; they can
  sue you if they feel their rights are
  compromised.

Loans are better for businesses if the

cash flow allows for realistic repayment

schedules and the loans can be obtained

without jeopardizing personal assets.

Equity investments are often the best way

to finance start-up ventures because of the

flexible repayment schedules.

If you don’t already know an accountant

specializing in small business affairs, you

will be wise to find one. Your personal tax

situation, the tax situation of the people

who may invest, and the tax status of the

type of business you plan to open are all

likely to influence your choice.

Common Money Sources to Start or Expand a Business .............................................

Most small businesses are started or

expanded with money from one of seven

readily available sources. They are in order

of frequency:

1. the savings of the person starting the
   business


2. money from close friends and
   relatives


3. scaling back cash requirements and
   substituting creative cost-cutting for
   financial equity


4. selling or borrowing against equity in
   other property


5. money from supporters or others
   interested in what you are doing


6. bank loans, and


7. venture capital.