FINANCING
Loans The great majority of all small businesses rely on three sources of funds for their operations: money invested by the owner; money loaned to the business by the owner; money loaned to the business from commercial lenders like banks. For most such businesses, however, the owner’s available cash is consumed in the investment with little remaining for loans by the owner. In theory, any business structured as a corporation or LLC –with shares or member interests – can raise equity capital by selling shares or interests in the business through a securities offering. In reality, few small businesses, and this is particularly true of a small child care business, can generate enough revenue and profit to provide a dividend stream to investors. Likewise, those businesses do not have a ready market for their securities that would allow equity investors a predicable exit strategy. This leaves debt, in the form of loans from commercial lenders, as the major source of initial and continuing funding of the business. It is important to remember that for the major commercial lenders, banks, their loan portfolio – on which they receive interest and fees – is their principal asset (not their deposits which belong to depositors and on which the banks pay interest for the use of those funds to support lending). At the same time, banks are heavily regulated by federal and/or state banking regulators to ensure the safety and soundness of banking decisions. In short, banks are in the business of making loans, but are constrained by regulation as to the number, kinds, and riskiness of those loans in terms of repayment. A lender may lend against the business’ assets (a secured loan) where the borrower’s pledge of assets against the amount of the loan provides the lender with at least partial protection against nonpayment of interest or principal. The lender may also loan against cash flow (an unsecured loan) rather than against hard assets based on the lender’s determination that the borrower’s cash flow will be sufficient over the term of the loan to ensure repayment. Loans may take the form of a term loan with a fixed end date and payment schedule or a revolving loan which allows
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