In the short term it can be attractive, since it does not need to be paid back, but in the medium and long run it can be "a very costly source of capital" for a business that is growing and can expect its equity to increase in value, Sherman said.
Sherman said many entrepreneurs need to turn to the equity markets to solve cash flow problems, reaching out to angels, angel networks, online funding or private placements, especially when they lack real estate or inventory or equipment to pledge as collateral. "It's a shame when that happens with a viable business," Stumpf added. "In a fast-growing business, you sell 10 percent for cash to make it continue to grow, but when you're growing 30 percent to 40 percent a year, that's a heck of a return on capital" being given to someone else. "You don't want to go the way of angel investors, because you know you're giving away a whole lot more than you're getting," Stumpf said. But selling equity to fund expansion is often a dreaded decision - and for good reason. This can be a good problem for business owners who have contracts lined up that will create significant cash flow but for which expansion is first needed. "Selling the business or some of the ground that you don't want to sell can be the only way to survive," he said. "The bank is in the business of collecting interest, not foreclosing on collateral," Stumpf said. Intangible assets are not the type of collateral that a typical commercial lender will accept, said Andrew Sherman, partner at Seyfarth Shaw, who has worked with companies at all stages of development.
And in many cases lenders are picky about asset types they will accept. In the end the business survived better than his strained friendships.Įven for business owners with collateral to back the loan, the cash flow needs to be coming in to meet debt payments. He eventually paid them back, but got behind and risked ruining relationships.
Years ago a friend of Stumpf's, who owned a heavy road construction company, got into a bind and borrowed money from buddies. Personal Loans for 670 Credit Score or LowerĮven if you have friends as nice as Elon's, borrowing money can cause problems. Personal Loans for 580 Credit Score or Lower Best Debt Consolidation Loans for Bad Credit
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