Raising Capital

There are many reasons a coffee company may wish to raise money including purchasing new equipment, opening a new location, purchasing another company or expanding the business in another way. If you are looking to raise capital to support a failing business, stop right now and remember the old adage, "when you find yourself in a hole...stop digging". If this is the case, please read my post on Controlling Costs. It is my opinion that using your accumulated profits to fund growth is the best way forward but here are some other options if this is not possible.

When raising funds the first place a business owner would think to look is the bank where your daily deposits go. This is a great place to start given your account manager can quickly access your account to determine consistency of deposits and net change in cash position on a monthly basis. Getting a loan from your financial institution comes with standard repayment terms and rest assured that they don't want to run or seize your coffee business, they just want to be paid on time. Interest paid on financed debt is deductible before taxes, and is on the whole a less expensive option than issuing Equity. The problem with banks and other financial institutions is they are fickle and prone to turning off the tap if they themselves are facing difficulty. The credit crisis of 2008 to present is a great example where money went from being abundant to scarce overnight. During this period, most businesses were forced to cut expansion plans and conserve cash as a self preservation mechanism knowing the banks wouldn't be there for them. A last note about banks, don't ever sign pledge your personal assets in order to obtain a loan. This is one of the reason's why you should incorporate your coffee company and sequester your personal assets from the reach of creditors should your business fail...which unfortunately does happen.

Family and friends are useful sources of cash, but beware of the impact it can have on your personal life. People who are not entrepreneurial view cash differently than business owners and expect to see the money on demand. Use this source of cash only as a last resort, and always provide a written term sheet detailing repayment details. I want to emphasize that this can be the most costly type of cash you'll ever access, and in many, many instances is not worth the cost.

Issuing Preferred Shares is a more complicated method of raising money but in a lot of cases is a great way of establishing a relationship with savvy investors without giving up any control of your coffee company. Preferred Shares are a special class of Shares in a corporation that do not have voting rights to make decisions for the company. Instead these Shares have a higher claim to the company assets should liquidation be necessary, and either a yearly dividend or other monthly income provision. Preferred Shareholders are always paid before Common Shareholders, and therefore will receive their money before the owners can receive any. Any investor in Preferred Shares will normally demand that management/owners wage and salary be capped to protect the value of their investment. This is a more expensive method of obtaining cash since payments dispersed to Preferred Shareholders are made after tax as opposed to pre tax for interest on loans.

I am constantly amazed at the clever ways a determined entrepreneur employs to raise funds. I have heard of pre-selling customer cards at a discount which gives the business immediate access to cash on goods to be delivered in the future. Selling under applied assets and equipment is another valid way of creating cash quickly. Some companies have used their connections to wealthy patrons to create "founders clubs" that act as informal Preferred Shares by offering the founders extra bonuses and services plus repayment terms. No matter how you raise cash, it all has a cost that should be studied and examined to determine how it will impact your Income Statement and Balance Sheet.