How should I inject working capital into my company?

Question

Me and two partners started a company earlier this year. Each of us owns 33.33% of the shares. Right now we are generating enough income to cover our monthly expenses, but we have already signed new clients that will allow us to turn some profit soon. We don't have employees and we have no debts.

The work we do requires us to regularly pay a few thousand dollars to service providers upfront. These costs are transferred to our clients (plus our commission), but in our line of service clients pay 30 to 60 days after billing, so we must be able to withstand a few months without receiving income. We have determined an injection of around $15K would allow us to achieve this.

I (personally) can provide this money from my savings, and to me it sounds like a better alternative than taking a loan from a bank or looking for external investors. My question is: would this be a loan to my company? If so, what parameters can I use to determine a reasonable period and interest rate? Should I be looking at this from another angle?

This is not in the U.S. by the way. The company is registered in Central America.

Answer 1

would this be a loan to my company?

Yes, or alternatively the company could issue out some new shares increasing your holding in the company over your partners. Another alternative would be that each partner ponies up an additional $5,000 in capital and the equity split remains the same.

If so, what parameters can I use to determine a reasonable period and interest rate?

Go to market and see what terms you are able to secure from a lender.

Should I be looking at this from another angle?

I know you are optimistic about your future prospects. I know it seems to make sense to finance the project yourself rather than pay interest to someone else, but default risk is real. Despite your best efforts your $15,000 might not come back to you. One of your customers might go 90 days, 180 days, or out of business. Also, your $15,000 is worth a lot more to you than it is to your partners, because if this company fails you get the loss completely, they don't. It might be worth paying someone else some interest to shoulder that risk. A private lender would probably require personal guarantees from you and your partners. If you lend the money to the company you would be wise to seek a similar guarantee.

If you are taking more risk than your partners you should be compensated appropriately for that risk. If everything goes to plan your partners will have benefited greatly from the use of your capital and that benefit should appropriately come at a cost to them.

If I were in your shoes, I'd say everyone pitches in an additional $5,000. They can get it from a loan on their own or whatever, but if everyone is to stay equal partners, everyone should equally share the risk.

Answer 2

There are a lot of options.

As @quid says, you could say that each partner has to kick in $5,000, however they get it. Then everyone shares the risk equally. Whether that works depends on whether you can all manage to get the money. Maybe one or more don't have $5,000 and no bank will loan them the money.

You could loan the company $15,000, to be paid back when profits start to come in. In that case you'd need to have an agreement with your partners about repayment terms and interest rate. No matter how good a friends you are and how much you trust each other, I'd put that in writing, if nothing else just so that there's no misunderstandings. (Like, "I thought you said the company didn't have to pay it back until we turned a profit?" "No, I said in 5 years. I may have said that I expected that we'd be turning a profit by then." Etc.) This has the big risk to you that if things go badly, you might never get your $15,000 back.

You could put in another $15,000 and get additional stock, so that you get a bigger percentage of the profits when (and if) there are profits. In that case you're risking more, but you get a bigger reward if the risk pays off.

Note that contributions to a company don't always have to be in dollars. Like I used to work for a company that was owned by two partners: One of them put up the bulk of the cash; the other's primary contribution was technical expertise.