The current economic climate is one most small business owners – no matter how long in business – have never experienced. As a result, it has caught more than a few seasoned entrepreneurs flat-footed.
As a practical matter, entrepreneurs as a whole are accustomed to wide swings in the fortunes of their business. The profitability and cash flow of a business can fluctuate dramatically from year to year. In good years, the owners take from the business; in lean years, they put some back.
Many businesses today need some outside financial support. The issue faced by many small business owners today is whether to provide that financial support and if so, how much, and under what terms?
Unfortunately, it certainly appears that a number of businesses may be forced to close the doors due to the economy. Some will be fairly young businesses whose birth came at a bad time in the economic cycle. However, some will be well established businesses that have supported a number of families and have survived a number of economic cycles.
In today’s environment, one cannot blindly put money into his or her business, confident that the good times will return. That doesn’t mean you shouldn’t reinvest in your business – it just means that any funds contributed to the business should be evaluated for what they are – an investment to be evaluated against other investments. After all, if the business doesn’t make any money, it is not really an investment.
More importantly, if the analysis indicates that an investment is prudent it should be structured properly. In many instances, small business owners, almost unconsciously, contribute a little here and a little there, ultimately adding up to a substantial sum, but all of which is reflected on the balance sheet as equity. Equity, in turn, is subordinate to all creditors of the company.
If an analysis indicates that investment at this time is appropriate, see your lawyer before doing anything. It may be possible to structure your investment as a loan secured by the assets of the company. By doing so, your investment may be higher in priority than general creditors, mitigating to some extent the risk of reinvesting at a time when the future is uncertain.
No one has a crystal ball and can predict the future. If your business needs capital, be sure to make a conscious decision to make an investment rather than an unconscious contribution to benefit others.
Robert Nicholson