Financial Basics

- Whether your company is a small coffee shop or a global coffee empire, your company wants to grow. Growth requires money. Money that can be invested in things like real estate, equipment, materials, technology and people. Acquiring this money or capital is the job of your finance team. Two methods for raising capital include debt financing, borrowing money and equity financing, raising money by selling ownership in the company. Let's begin with debt financing. Borrowing money. A small coffee shop owner just like an individual looking to buy a home can go to a bank for a $100,000 loan that must be repaid in five years with 10% interest. Starbucks could also get a bank loan but Starbucks also has the option of selling bonds. Bonds are like small loans from individuals instead of banks. Starbucks could raise $500,000 by issuing 500 individual bonds at $1,000 each with a 10-year repayment schedule at 7% interest. So if you bought a Starbucks bond, Starbucks would treat you like a bank. They would make regular payments to you with interest. Equity financing, on the other hand, uses the value of the company to acquire money. Three types of equity financing including using retained earnings, selling stock and seeking venture capital. Using retained earnings means taking profits from sales and instead of paying the owners or putting the money in savings, the company takes those profits or retained earnings and invests them in the company. This is something that either the small coffee shop or Starbucks could do. Starbucks though might also consider selling stock. A share of stock represents ownership in a small part of the company. Suppose Starbucks decides to divide ownership of the company into 1,000 shares and sells some of those shares to the public. If you bought 100 shares or 10% of the 1,000 shares, you would own 10% of the entire Starbucks corporation. If you bought those 100 shares for $50 each, a total purchase price of $5,000, Starbucks would now have your $5,000 to invest in growing the company and you, now a part owner, would benefit if Starbucks was successful but the small coffee shop probably can't sell stock to the public at large. Instead they might try and get venture capital. Just like selling stock, venture capital funding means the coffee shop owner sells ownership in the company to investors. Here though there are only a few private investors and since the company is small, and the risk is high, these venture capitalists expect high returns for their investment. Now, think about your company. Think about some of the projects that could help the company grow. Based on the size and success of your company, what's more likely? Debt financing or equity financing? Will your company borrow money, sell ownership to investors or will they simply use retained earnings for their investment? Now you're thinking like a member of the finance team.