Because new businesses — especially startup ventures — often never generate a profit and ultimately fail, having your business in a position to repay investors is a key milestone that should be celebrated. Businesses that are in a position to repay small business investors often have met certain expectations when it comes to revenue, net income and financial stability.
Small Business Investor Expectations
Investors that take equity stakes in companies, especially startup businesses, expect to reap large returns and rewards if the venture achieves a high level of success. If your business was fortunate enough to attract capital from equity investors and even more fortunate to thrive and increase in value, your investors expect to share in that success. This occurs through having their original investment repaid in addition to a monetary gain above their principal.
Investor Payback Options
As there are many types of investor funding, there are also several investor payback options you can reward your investors for their support and the risk they took when first providing capital to your company.
- For investors who provided a loan, you can simply repay the loan and interest owed to the investor, either through scheduled monthly repayments or as a lump sum.
- You can buy back the investor’s shares in the company at an agreed-on buyback price.
- If large lump-sum cash transactions may stretch your company’s finances too thin, you can consider paying dividends to your stockholders. The dividends would be cash payments made to shareholders and paid out of the company’s net income.
- You could consider selling your company to a larger business or even taking your company public on a stock exchange.
Preparing Your Business
Repaying your investors can be a complex transaction and involves a great deal of legal and regulatory support. Transactions involving repurchase or resale of common stock are subject to greater scrutiny and complexities than repaying an outstanding balance on a loan. The financing for repaying investors can come from the company’s bank account, taking on a new loan or even sale of assets if the situation merits it. Before arbitrarily handing your investors back their capital plus a return, understand the impact to your company’s financial situation, as well as future expansion opportunities.
Implications of Repaying Investors
In addition to parting with the company’s cash on hand or selling the business, you can expect significant changes in the operation of your business. The day-to-day business may not change much, but an investor who no longer has any vested interest in the company may be less available to refer clients or provide other consulting support. In the event of a sale to another company, you may find yourself reporting to an executive at the acquiring company and having to run the business on the buying company’s terms versus yours.
Benefits of Repaying Investors
There are upsides to repaying small business investors. If you have provided your investors with a strong return on their investment, it is likely you can come back to the group at a later date and confidently raise even more capital. Your track record of success may also open up opportunities to work with other companies that need to raise capital to expand. Also, in the event you repaid the loan or repurchased all of the shares issued, your company may fully belong to you and any future benefits will not have to be shared with the investors.
Terence Channon first began writing in 1998. His writings primarily focus on small business, personal finance/investing and e-commerce. Channon holds a Bachelor of Arts from Stetson University in religious studies and participated in the school's Roland George Investments Program and Prince Entrepreneurship Program.