How to Fund Your Business With Bonds and Indirect Funding Sources While very few small businesses issue bonds, there are several advantages to this fundraising method.
This is part 7 / 10 of Write Your Business Plan: Section 2: Putting Your Business Plan to Work series.
There are two kinds of debt financing: straight loans and bonds. Bonds give you a way to borrow from a number of people without having to do separate deals with each of them. If you need to borrow $500,000, for instance, you can issue 500 bonds in $1,000 denominations. Then you can sell those bonds to anyone who'll buy them, including family, friends, venture capitalists, and other investors subject to stringent legal constraints.
Corporations use a bewildering variety of bonds for financing, but the most common type simply calls for you to pay a stated amount of interest on the face amount for a certain period. After that time, usually five years, you pay back the face amount to the buyer.
Bonds give you the great advantage of being able to set the interest rate and terms and amount you're trying to raise instead of having to take whatever a lender offers. The problem with bonds is that they are regulated similarly to public stock offerings. So, although they're widely used by big companies, very few small companies issue them.
There is an exception to this general rule. Some states pool together long-term loans in state-guaranteed industrial bonds for industrial (read: job-creating) businesses. This has the advantage of lowering the issuing costs for the companies involved while providing the patient quasi-capital they need to succeed. Check with your state's economic development department.
Indirect Funding Sources
Direct funding sources put money into your business. Indirect funding sources postpone taking money out of the business, thus conserving working capital. Trade credit is far and away the most important indirect source of funding.
You don't need a loan application, permission from the Securities and Exchange Commission, or even a note from your mother to take advantage of one of the most useful and popular forms of financing around. Trade credit, the credit extended to you by suppliers who let you buy now and pay later, can make a substantial difference to your cash flow.
You can measure the amount of trade credit you have outstanding by simply adding up all your accounts payable, or the amount outstanding of bills on your desk. Any time you take delivery of materials, equipment, or other valuables without paying cash on the spot, you're using trade credit.
For many businesses, trade credit is an essential form of financing. For instance, the owner of a clothing store who receives a shipment of bathing suits in April may not have to pay for them until June. By that time, she can hope to have sold enough of the suits to pay for the shipment. Without the trade credit, she'd have to look to a bank or another source for financing.
Related: Choosing A Business Loan Type
Factoring is the flip side of trade credit. It's what happens when a supplier sells its accounts receivables to a financial specialist, called a factor. The factor immediately pays the amount of the receivables, less a discount, and receives the payments when they arrive from customers. Factoring is an important form of finance in many industries.
Know Your Business's Value
The National Association of Certified Valuation Analysts is the trade group for people whose business is deciding what businesses are worth. It can help you find a valuation analyst as well as learn the basics of figuring out a business's worth. Contact NACVA at NACVA.com.
Related: Finance Your Money Right