Today I found this helpful article on CNNMoney
about ways to finance a startup. Though the ways of financing is
familiar to most, I would guess that many entrepreneurs don’t know how to
record this accurately in the books. It could be classified as an asset,
investment, owner’s equity or loan.
Here are the seven ways, and I will explain how to classify in your business’ Chart of Accounts.
1. Bootstrapping. That is simply using your own
money to finance the business. You can account for this by classifying
this as an equity account and calling it Owner’s Investment.
However, if you “loan” the business funds periodically by paying for
expenses that you want to be reimburse for, then you should also add a
liability account called “What The Business Owes Me“.
2. Friends and Family. This could be a loan or
investment depending on the agreement you set with your people. It is
good policy to have this designated in writing with the terms for
repayment or if the person have an equity stake in your business. If
this indeed is a loan, the accounting for this to set up a liability
account called Friend/Family Loan. If it an investment, then set up an equity account for this and called Friend/Family Investment. Then you also would want to set up a corresponding Friend/Family Draw account to note payment of profits back to them.
3. Banks. Classify as a loan. Depending on the
terms it is either a current or long term liability. If it is actually
a credit card as oppose to a line of credit, then set it up as such.
4. Grants. If you are diligent and lucky enough to
receive a grant, then it is a boon to your business. Classify it as an
asset and tell your friends. Grant awards are great publicity!
5. Angels and 6. Venture capital.
The accounting is similar for both (an equity account for the
investment.) However, the difference is whether Angel Investor or
Venture Capitalist is a partner or member of your business and how is
profit/capital gains paid to them.
7. Customers and suppliers. This can be a bit
tricky. Are you customers/client merely referring new business to you
or are they official partners in your business? If it just a referral,
then an agreement should be drawn to specify the percentage of the
referred sale your customer/supplier brings to the business. Classify
the sale as referral/commission income and the payout as a commission
expense. If you customer/supplier is more like a business partner, then
you have to determine what their role is and what is their member or
partner draw. That has to be clearly described in contract terms.