Business Financing 101: Funding Your Corporation

Starting and maintaining a corporation requires substantial capital. From initial setup costs to ongoing operational expenses, securing adequate funding can make or break it. This article explores various methods and considerations involved in effectively funding your corporation.

What Is Business Financing?

Business financing refers to the various methods through which the owner can acquire capital to fund its operations and growth. This may include debt, equity, or a combination of both. The choice will depend on the stage of the business, the amount of capital needed, and the company’s long-term goals, among other factors. Each option presents unique opportunities for your business’s future.

In particular, there are primarily two classifications for funds that you place into your corporation’s bank account: capital contributions and loans. Larger corporations will have a third class, similar to a loan, called corporate bonds.

Types of Financing Available

Bank Loans

It can often be difficult for corporations to get loans unless they consistently show sufficient income to repay them. New corporations are less likely to get bank loans because, like college students just starting, they will not have much or any kind of credit history. 

Moreover, if you try to get a bank loan with a new corporation, chances are that you—as an individual—will have to co-sign for the corporation. This is one way many new corporations begin to build depth in their credit history.

Personal Loans

By loaning money to a corporation, you are giving the corporation funds. In exchange, the corporation is going to give you a promissory note that states its length and rate of return (interest). If the corporation issues a promissory note for a loan, be sure to create a corporate resolution authorizing the loan.

This resolution formalizes the decision and ensures compliance with internal governance procedures. It involves approval by the board of directors or shareholders and affirms the corporation’s commitment to honoring the loan agreement.

Corporate Bonds

Corporate bonds are debt securities issued by corporations to raise capital. When a corporation issues bonds, it borrows money from investors who purchase the bonds. In return, the corporation agrees to pay periodic interest payments (coupon payments) to the bondholders and repay the principal amount at the bond’s maturity date.

These bonds have fixed interest rates and varying maturity dates, offering investors predictable income streams and defined repayment schedules. Credit rating agencies rate corporate bonds based on the issuer’s creditworthiness to assess the risk associated with investing in them.

Capital Contributions

A capital contribution means that you are placing money into a corporation as an investor of the corporation. When you place your money into a corporation as an investment, the corporation gives you shares of the corporation’s stock in exchange for the money you have contributed. 

The number of stocks you receive is based on the value of each share. A share of stock could be worth one dollar or one million dollars. Capital contributions can also take various forms, including cash, property, or services rendered to the corporation. 

There are specific considerations about the tax treatment of contributions from shareholders and non-shareholders, so be sure to consult a tax professional.

Business Grants to Consider

Business grants are another way for corporations to obtain funding. Unlike loans, grants do not need to be repaid. Instead, these financial awards provided by government agencies, private foundations, and non-profit organizations support business growth and development.

Small Business Innovation Research (SBIR) Program

The SBIR program encourages domestic small businesses to engage in federal research and development with the potential for commercialization. It is structured in three phases:

• Phase I: Establishes the technical merit, feasibility, and commercial potential of the proposed research and development efforts. Awards are up to $150,000 for six months.
• Phase II: Continues the R&D efforts initiated in Phase I. Funding is based on the results achieved in Phase I and the scientific and technical merit and commercial potential of the project proposed in Phase II. Awards are generally up to $1,000,000 for two years.
• Phase III: The small business pursues commercialization objectives from Phase I/II R&D activities. No SBIR funds are awarded in this phase.

Small Business Technology Transfer (STTR) Program

Like the SBIR, the STTR program expands public/private sector partnerships to include joint venture opportunities for small businesses and nonprofit research institutions. The STTR program requires the small business to collaborate with a research institution.

Economic Development Administration (EDA) Grants

The EDA, a part of the US Department of Commerce, provides grants to economically distressed communities to generate new employment, help retain existing jobs, and stimulate industrial and commercial growth. Programs include:

• Public Works Program: Provides funding for infrastructure improvements to attract new businesses and support the expansion of existing businesses.
• Economic Adjustment Assistance Program: Offers funding for communities facing sudden and severe economic dislocations, such as natural disasters or plant closures.

Corporate Grants and Sponsorships

Many corporations allocate funds for corporate social responsibility (CSR) initiatives, which may include grant programs supporting entrepreneurship, education, or sustainability projects. Corporate grants often seek to enhance the company’s reputation, foster innovation, or engage with local communities where they operate.

Common Business Expenses

Operating a corporation involves various expenses that are part of its day-to-day. These expenses can broadly be categorized into the following:

Operational Expenses

These are costs directly related to producing goods or services. Operational expenses may encompass raw materials, production labor, and machinery maintenance for manufacturing businesses. Service-oriented corporations might incur expenses, such as employee salaries, client acquisition costs, and service delivery expenses.

Administrative Expenses

Administrative costs cover the overhead necessary to support daily operations. This covers expenses like rent for office space, utilities, office supplies, and administrative staff salaries. Additionally, costs associated with legal compliance, accounting services, and insurance premiums fall under administrative expenses.

Strategic Expenses

Strategic expenses are investments aimed at achieving long-term growth and competitive advantage. This category includes expenditures on research and development (R&D), marketing campaigns, expansion into new markets, and acquisitions. Strategic expenses are critical for innovation and maintaining a competitive edge in the market.

How to Choose the Right Financing Option

• Assess Capital Needs: Determine how much capital is required for different stages of your business, such as startup, growth, and expansion phases. Create detailed financial projections to understand your funding requirements.
• Evaluate Business Stage: Startups may benefit from angel investors or venture capital, while established companies might prefer bank loans or initial public offerings (IPOs).
• Understand Investor Expectations: Venture capitalists and angel investors often seek high returns and may want a say in business decisions. On the other hand, debt financing requires regular repayments.
• Consider Long-Term Goals: If you aim for rapid growth and are willing to share ownership, capital contributions might be more sensible. Bank loans could be a better choice when maintaining control is a priority. 

Main Takeaway

It goes without saying that part of running a successful corporation is funding it. Whether you’re expanding operations, launching a new product line, or investing in infrastructure, having enough capital can sustain the corporation’s growth for years to come. 

If you need help determining how to fund your corporation, our business formation experts at NCH are here to help. We will guide you through the complexities of financial planning and securing the right funding for your chosen business entity–be it an LLC or a corporation.

Call us today at 1-800-508-1729 to schedule your free consultation!

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.