The Cost Of Doing Business

The cost of capital is the fixed cost charged to a business by its lender to fund the business acquisition. This includes the grant, acquisi...

The cost of capital is the fixed cost charged to a business by its lender to fund the business acquisition. This includes the grant, acquisition price, and personal guarantee to finance the acquisition. Cost of capital is normally expressed as a percentage of book value or as an amount necessary to equate the assets to cash.

Cost of capital can be calculated using as a percentage of book value but it is more practical to compare it to an industry average to obtain a more realistic view of what a business must earn or return on capital in order to survive.

Although a majority of companies who obtain capital from banks will earn less than the industry average, these companies typically obtain capital from institutional lenders. Institutional lenders are riskier companies that are required to have a plan to guarantee 100% of the capital committed, if the business fails to succeed. The government requires 100% of capital for the purpose of Section 363 of the Corporations Act.

This leaves an industry group of companies to seek capital from private investors. Private investors typically pledge their own assets to secure the capital as part of the investment.

The return on capital for businesses that obtain capital from private investors is usually higher than that of their institutional counterparts, but most private investors are not willing to pledge their own assets to fund a new business startup.

This would imply that a business must have a strong credit rating, preferably with the Small Business Administration. The SBA can help facilitate the credit application, but they will only grant credit after a full assessment of a company's operations and business plan. A company must also be certain that its employees can pay their own salary, even if the business is successful.

When seeking capital, a business must prove that its operations and business plan have a sound financial foundation. The business must also build this business plan around strong employees and strong customer bases.

If a company does not have strong sources of credit and strong employees, how will it fund its expansion? The answer is, by selling equity to an existing investor group, or by selling land to a new buyer. Selling land to a new buyer provides a quick infusion of capital into a company's bottom line. Selling equity to an existing investor group allows a business to enter into an agreement with the group, but the business pays an upfront fee. The equity payment can be rolled into the revenue agreement. The business also needs strong customers to support its revenue agreement, and strong employees to support its employees.

So should your business seek capital from an institutional investor or a private investor? Again, it depends on your industry and situation.

1. Industry-specific Considerations - One of the great advantages of private funding is that it allows a business to go where it feels is best for the company. It can make decisions based on what seems best for the business, rather than on considerations such as industry size, location, industry trends, or the needs of investors. Private investors typically seek more information and advice than institutional investors, and they may require more and stronger assurance from the business on a case by case basis. Private funding can save a business money, but it also can cost it money.

2. Risk of Loss - If a private investor is unsuccessful, it is not at risk of loss. Institutional investors are at risk of loss if their investment falls below what they have committed. There are exceptions, such as if the investor were to terminate before the end of the term of the investment contract. Most private investors are successful, but they also face the risk of loss if their investment falls below what they have committed.

You should know that institutional investors are focused on the success of the business, and the investment contract includes provisions for a monitoring committee and a board of directors. These safeguards, plus a private investor, enable institutional investors to reduce the risks associated with private funding.

You should also know that your institution does not have to disclose the specific reasons why it has not granted you capital. However, the institution will disclose its reasons to investors, and the details will be public information. It is your responsibility to know what protections you have from being harmed by your institutional investor. There is a process in place for a written request for a change in investment from a private investor. It is not the institutional investor's responsibility to make the request, and you must approve the request. It is your responsibility to know the process if you are granted a request.

3. Your institution does not have to disclose the criteria used to select the particular investor you have, but it must disclose what criteria are in use. For example, the criteria may have been influenced by your records, or by your financial history. It must disclose what criteria are being used.

What happens when your institution changes the criteria used to select the investor you have?

1. You'll receive the new investor's documents (proposed investment contract and supporting schedule). The contract and schedule will be a part of your institutional files. You'll need to sign and date the contract, and give it to the investor.

2. If your institution is not providing your proposed contract to you, then you should discuss the proposed contract with the investor. You should prepare a summary of the contract and provide it to the investor along with your signed contract. This document serves two purposes. It helps you and the investor verify the terms of the proposed contract. It also allows you to request a hearing about the contract with the investor.

3. If you have received the contract and it is different from what you have asked for, then you can ask that the contract be changed. The investor may agree to the change.

You may also have to provide the investor with a letter from your doctor stating that you are psychologically stable.

If you have been denied permission to speak to the investor, you may wish to consider taking legal action. Speak to an attorney about your next steps.

It is very important that you do everything you can to maintain a positive relationship with the investor you have been denied permission to speak to. Remember, they have the power to make a change to your institution. It's likely you will be told that the agreement is between you and the investor, and that you must work with the investor you have been granted permission to speak to. You will have to prove that your relationship with the investor is as strong as you say it is, and will give you the same access to information as before. If you have to file a lawsuit to prove your relationship will be the same, it may not be worth it. However, if you don't want to be tied to the outcome, but still want to speak with the investor, then it may be better to file a lawsuit now. The agreement between you and the investor is usually between the last week of March, so don't wait too long to file a lawsuit.

If the investor you have been denied permission to speak to responds well to your information, you may have a good chance of getting the job. Your request for funding will already be in the system, and you may have a shot at a job offer.

> As a business, it's important that you also have access to the investor's books. That's why they granted you access to their information in the first place.

What they have already given you is almost always far less than what it will cost to hire someone to do it. The only exception is if the information the investor has given you isn't current, in which case it's better to wait until the investor gives you updated information. In that case, you can always file an Access Request to get whatever it is that you need to do done, before the end of March. There is no particular order of priority, so a request for information may come at the beginning of April, but it may also be late January. The key is to get it done, so your application will have time to be reviewed and/or changed.

The Access Request is usually the first request that you get. From that point, you are in business. If your request is granted, then the next request that comes in for information should be the next opportunity for you to speak with the investor, and thus a chance to further sweeten the deal.