Working capital is the basis of any business. It is the money used to support the business. A small business is expected to face the challenge of raising capital with greater grit than big businesses that often have more resources at their disposal.
Capital (or lack thereof) decides the fate of a small business. Employee satisfaction, employee retention, growth and scope of the business and healthy competition are all based on the amount of capital that a small business has access to.
Net Present Value
The net present value of a company can be calculated using the company’s marginal cost of capital. Net present value, or NVP, is the difference between the present value of cash inflow and the present value of the outflow of cash. This is a business calculation that compares the value of the dollar. It also considers the rate of inflation and returns.
The total capital investment of a company amounts to the value of its equity and the total cost of its debts.
Capital budgeting is used to determine the resources of a small business. It is expected to work in a way that the present net value of investments made in the business is positive. Only then can the business be considered stable. Typically, business investments are made for obtaining physical resources, financial resources or intangible resources.
Physical resources include solid assets such as buildings, machinery, computers, chairs, tables, telephones and stationery.
Financial resources include financial instruments, such as securities, shares, equity investments and bonds.
Intangible resources include software, intellectual property and patents.
Several intermediaries such as banks, mutual funds and investment clubs are engaged in the business of financial investments.
Small Business Capital Plans:
Small businesses can apply for term loans to meet their need for working capital. Banks offer term loans with a fixed rate of interest and a fixed maturity period, to support small businesses. Banks usually approve the applications only when they are confident about the character and business plan of the company.
Banks examine the creditworthiness of a company or business by analyzing the experience of other creditors and a credit report, both personal and business related. They generally approve a business loan for small business when they have confirmed that the business plan is solid and workable and that the risk of the business failing is relatively low. They also consider the liquid assets of the company or business that are able to be converted into cash, if the need arises.
Small businesses are the fastest growing businesses in the United States. Therefore, the government supports small businesses since they help generate employment. There are various capital programs offered by the government to help the small businesses flourish. These programs are commonly known as Tax Credit Programs.
Direct Equity Tax Credit Program: These programs provide a tax benefit of a certain amount to private investors who directly invest in eligible small businesses.
Labor Sponsored Venture Capital Tax Credit Program: It provides a certain amount of state tax credits, along with a certain percentage of the federal tax credit to investors who make investments in large corporations. These big firms in turn re-invest the financial fund in eligible small businesses.
Tax credit programs provide financial assistance to small businesses. The business should strictly follow this objective and use the money towards the establishment, upgrade and expansion of the business. These companies are not permitted to use this money to pay off their debts.