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Trade credit and the discount it gives up, invoice financing, leasing, grants with match funding, equity and the share it gives away, and crowdfunding net of fees and rewards, each matched to the need it suits.
Paper packet. Every task here also exists on screen, where it is checked automatically; answers written on paper are not assessed by Nydus. When you are back at a device, enter your answers there.
You will price trade credit, invoice financing, a grant, equity and a crowdfunding campaign in the same terms, work out an investor's share and the founder's proceeds from a later sale, and match each kind of money to the need it suits.
You can build a loan's schedule, price a line of credit by the day, judge a purchase on its payback, and read what a supplier's terms do to cash. This lesson sets every common source of money for a small business side by side, prices each one, and matches it to the need it suits.
| Term | What it means |
|---|---|
| Trade credit | Time a supplier gives to pay a bill, sometimes with a discount for paying early. |
| Invoice financing | Borrowing against unpaid invoices: most of their value now, the rest when customers pay, less a fee. |
| Grant | Money given for a stated purpose, usually with conditions and often paid after the spending. |
| Match funding | The share of a project the business must pay itself for a grant to be given. |
| Equity | Money put in for a share of the business and of its future profits. |
| Crowdfunding | Raising small sums from many people through a platform, for rewards, shares or interest. |
A business can fund what it needs from several places, and each one charges in its own way:
| Source | What it costs | Repaid? | Suits |
|---|---|---|---|
| Owner's own money | The owner's other uses for it | No | Starting out; small gaps |
| Trade credit | Any discount given up | By the due date | Stock and supplies |
| Line of credit | Daily interest and fees | Flexibly | Short timing gaps |
| Invoice financing | A fee on each invoice | When customers pay | Slow-paying customers |
| Loan | Interest | In installments | Things that last years |
| Lease | More than the price in total | Monthly | Equipment that dates |
| Grant | Conditions and match funding | No | A project that fits a scheme |
| Equity | A share of all future profit | No | Growth with uncertain returns |
| Crowdfunding | Platform fees, rewards or shares | Depends on the kind | Products customers want |
The first rule is to match the length of the money to the length of the need. A timing gap of two weeks is funded with money that is repaid in a two weeks; a tractor that lasts ten years with money repaid over years; growth that will take years to pay, if it pays at all, with money that has no fixed repayment. Mismatches are where businesses get hurt: equipment bought on a line of credit that the bank can withdraw, or a short gap filled by selling a share of the business for ever.
The second rule is to price each one in the same terms — what it costs a year, or in total — because a fee, a discount given up and a share of future profit do not look like interest, and each can be dearer than a loan.
Another way: steps
Name the need. One sentence: what the money is for and how long it will be tied up. Stock for Christmas is tied up for two months; a van for five years; a second site for longer than anyone can say.
List the sources that fit. For a short need, trade credit, the line of credit and invoice financing; for an asset, a loan, a lease or equipment financing; for growth with uncertain returns, the owner's money, equity or a grant.
Price them alike. Turn each cost into a figure for the whole period or for a year: interest from the schedule, fees from the terms, the discount given up, the share of profit or sale price given away.
Read the strings. Security over assets, personal guarantees, grant conditions and reporting, an investor's seat at the table.
To check a choice, put it in the cash forecast: the money arriving on its real date, the repayments or fees on theirs. A source whose payments push the low point below the buffer does not fit, however cheap it looks.
A supplier who offers 2 percent off for paying within 10 days, or the full amount within 30, is lending the business money for 20 days at a price: the 2 percent given up. On a 1,000 bill, the café pays 980 on day 10 or 1,000 on day 30, so the 20 extra days cost 20 dollars.
As a yearly rate that is very dear. The café pays 20 to keep 980 for 20 days; there are about 18 such periods in a year, so the rate is roughly 2 ÷ 98 × 365 ÷ 20, about 37 percent a year. If the café has the cash, or a line of credit at 18 percent, paying early and taking the discount is the cheaper way. Trade credit with no discount on offer, on the other hand, is free money for its term and worth using in full.
An investor who puts money in for shares is not repaid, charges no interest and can lose everything if the business fails. In return they own a share of the business: of every future profit paid out and of the price if it is ever sold.
The share depends on what the business is agreed to be worth. If Fixit Mobile is valued at 60,000 before an investment of 20,000, it is worth 80,000 afterwards and the investor owns 20,000 ÷ 80,000 = 25 percent. Dan keeps 75 percent of a larger business. If it is sold in five years for 400,000, the investor receives 100,000 for their 20,000 — the real price of the equity, paid at the end.
So equity is the cheapest money if the business struggles and the dearest if it thrives. It suits growth whose returns are uncertain and slow, where fixed repayments would sink the business. Investors also usually expect information, a say in large decisions, and sometimes a seat on the board.
Grants for ordinary small businesses are rarer in the United States than many owners hope; most come from state and city economic-development programs, utilities paying toward energy-saving equipment, and federal research programs such as SBIR for technology firms. They are not repaid, but they come with conditions — what the money may be spent on, reports, sometimes clawback if the conditions are broken — and many pay only a share of the cost, so the business must match-fund the rest. Many pay in arrears, after invoices are shown, so the business needs the whole cost in cash first. Programs open and close; each publisher lists its current ones.
The Small Business Administration mostly helps through loans rather than grants: it guarantees part of loans that banks make under its 7(a) program, and funds microloans through nonprofit lenders, which lets banks lend to businesses they would otherwise turn down. The loan is still repaid in installments and priced by its schedule.
Crowdfunding raises small sums from many people through a platform. In reward crowdfunding backers pre-buy a product or receive a thank-you; the business pays the platform's fee and the payment fees, and must then make and send every reward. In equity crowdfunding, which in the United States runs under the Securities and Exchange Commission's Regulation Crowdfunding through registered portals, backers buy small shares. A successful reward campaign also proves that customers want the product, which is sometimes worth more than the money.
Two ways of paying for equipment monthly look alike and end differently. Under a lease the business rents the equipment for a fixed term and hands it back at the end, or buys it for its market value; the lessor keeps it, services it if the lease says so, and bears the risk of what it will be worth. Under an equipment financing agreement — an equipment loan, or a lease with a one-dollar buyout at the end — the business pays installments and owns the equipment once the last one is paid.
A lease suits equipment that dates quickly or that the business will want to replace — registers, laptops, a coffee machine on a supplier's contract. Equipment financing suits equipment the business means to keep for its whole life, like a van, and behaves much like a secured loan. Both keep cash in the account on the day, and both cost more in total than paying outright; the comparison with the equipment lesson's buy, borrow or lease is made the same way, on the total paid and on the cash kept.
A juice bar making a steady profit wanted a second site, costing about 60,000 to fit out and needing 15,000 of working cash while it built up trade. The owner priced four ways to fund it.
A five-year bank loan for the fit-out at 9 percent would cost about 1,245 a month, some 14,700 of interest over the term, and needed a personal guarantee. The equipment — blenders, fridges, the counter, about 20,000 of the 60,000 — could instead be leased, keeping that much cash. A state grant for hiring in a designated revitalization area would pay 30 percent of the first year's wages for two new staff, about 12,000, but only after each quarter's payroll was shown. And an investor offered 50,000 for 30 percent of the whole business.
The investor's offer valued the business at 50,000 ÷ 0.3, about 167,000 after the money, and would take 30 percent of the profit of both sites for ever: at the owner's forecast of 60,000 a year from the two sites, 18,000 a year. The loan cost less than that in total, but only if the second site succeeded.
She chose a mix. She leased the equipment, borrowed 40,000 over five years for the rest of the fit-out, applied for the wage grant and planned the line of credit to carry the payroll until each quarter's grant arrived, and declined the investor. The cash forecast, with every payment on its date, kept its low point above her buffer, which was the test that decided it.
Banks and investors ask for a list of every source of funding a business uses, because each one has a claim: a lender's security, a lessor's equipment, a grant's clawback, an investor's share. Knowing who is owed what, and in what order, is part of knowing what the business is worth.
Trade credit is free. Not when it costs a discount; then it can be the dearest money there is.
Equity is free money because it is never repaid. It is paid for with a share of every future profit and of the sale price.
A grant covers the project. It often covers a share, and pays after the spending.
What a crowdfunding campaign raises is what the business gets. Fees and rewards come out first.
Any money will do for any need. Match the term of the money to the term of the need.
Read the agreed value before the money goes in.
$60000$
What Dan and the investor agree it is worth.
Find the value after the investment.
$60000 + 20000 = 80000$
The business plus the new cash.
Find the investor's share.
$20000 \div 80000 = 25 \text{ percent}$
Their money over the whole.
Find Dan's share.
$100 - 25 = 75 \text{ percent}$
Of a larger business.
Price the equity on a later sale at 400000.
$400000 \times 0.25 = 100000$
What the 20000 finally cost.
Read the terms.
$2 \text{ percent in 10 days, or net 30}$
A discount for paying early.
Work the discount on a 1000 bill.
$1000 \times 0.02 = 20$
Given up by paying late.
Count the days it buys.
$30 - 10 = 20$
Extra days of credit.
Turn it into a yearly rate.
$\frac{20}{980} \times \frac{365}{20} \approx 0.37$
About 37 percent a year.
Compare with the line of credit.
$37 \text{ against about } 18 \text{ percent}$
The line of credit is cheaper.
Decide how to pay.
$\text{pay on day 10, from the line of credit if needed}$
Take the discount.
Read what was raised.
$12000 \text{ from } 240 \text{ backers}$
Each pre-bought a season of boxes.
Work the platform and payment fees at 8 percent.
$12000 \times 0.08 = 960$
Taken before the money arrives.
Find the money received.
$12000 - 960 = 11040$
In the account.
Cost the rewards: boxes costing 25 each to grow and deliver.
$240 \times 25 = 6000$
Owed to backers over the season.
Find what is left for the project.
$11040 - 6000 = 5040$
For the packing shed.
Set it against the shed's cost of 4500.
$5040 - 4500 = 540$
Enough, with a little over.
Put the rewards' costs in the forecast.
$6000 \text{ over the season}$
Spent after the shed is built.
Work the advance.
$5000 \times 0.8 = 4000$
In the account now.
Work the fee.
$5000 \times 0.02 = 100$
The price of having it early.
Find the balance paid later.
An investor offers Fixit Mobile $38060$ dollars for new shares. Dan and the investor agree the business is worth $134940$ before the money goes in. What percentage of the business will the investor own afterwards?
Answer:
Complete the worked solution: a bakery raises $18000$ dollars from $170$ backers on a reward platform. The platform and payment fees together take $10$ percent, and each backer's reward costs the bakery $20$. Find what the bakery has to spend.
Work the fees.
$18000 \times 10 \div 100 =$ p
Taken before the money arrives.
Cost the rewards.
$170 \times 20 =$ w
A promise to every backer.
Take both from what was raised.
$18000 - (\text{fees}) - (\text{rewards}) =$ k
What is left for the project.
Set it against the project's cost.
$\text{is it enough?}$
The headline figure was never all available.
Put the rewards' dates in the forecast.
$\text{rewards shipped later}$
Their cost leaves after the money is spent.
Corner Bean's roaster sends a bill of $6900$ dollars on terms of 2 percent off if paid within 10 days, otherwise the full amount within 30 days. Fill in the figures, in dollars.
| Amount | |
|---|---|
| Discount for paying early | |
| Amount paid early | |
| Extra days of credit from paying late | |
| Cost of each extra day |
Five needs at Long Row Gardens and its neighbors. Match each to the kind of funding that suits it.
| A line of credit | Invoice financing | A loan or a lease over its working life | Equity from an investor | Reward crowdfunding | |
|---|---|---|---|---|---|
| Two weeks between paying for seed and being paid by restaurants | |||||
| $7000$ of invoices to a supermarket on sixty-day terms | |||||
| A tractor that will last ten years | |||||
| A second site whose profits are years away and uncertain | |||||
| A new salad box that regular customers are keen to pre-order |
Long Row Gardens sends a supermarket an invoice for $1200$ dollars on sixty-day terms. An invoice-finance company advances 80 percent of it now and pays the rest, less a fee of $3$ percent of the invoice, when the supermarket pays. Fill in the figures, in dollars.
| Amount | |
|---|---|
| Advance now | |
| Fee | |
| Balance when the supermarket pays | |
| Everything received |
Years ago an investor bought $22$ percent of a bakery and the founder kept the rest. The bakery is now sold for $323000$ dollars. How much of the sale price goes to the founder, in dollars?
Answer:
A florist applies for a local grant toward a $36000$ dollar storefront renovation. The grant pays $50$ percent of the cost, up to at most $18000$, and is paid only after the work is finished and the invoices are shown. Fill in the figures, in dollars.
| Amount | |
|---|---|
| Grant, after the cap | |
| Florist's own share | |
| Cash needed before the grant arrives |
Lesson test: one question per skill, one attempt each, no hints. Your answers are checked when you submit.
A café's main supplier bills about $5500$ dollars a month and offers $3$ percent off every bill paid within ten days. How much a year would the café save by always paying early, in dollars?
Answer:
You can price each way of funding a business and choose one whose term fits the need. Tell someone why equity is the cheapest money if the business struggles and the dearest if it thrives. Next: a cash forecast read at its low point.
16. Your turn: a 5000 invoice financed at 80 percent with a 2 percent fee, step 3
$5000 - 4000 - 100 = 900$
When the customer pays.