Running a small business with a partner or two can be rewarding. It can also be challenging, especially if circumstances change with one of the owners. For example, if you start to work more hours at the company than your co-owners or one of the founders leaves the small business, it may be time to change ownership shares.
Even if your company’s ownership formation is working well at the moment, it’s a good idea to understand what types of circumstances may cause this to change. Take a look at 4 reasons why you may decide to split profits differently in your business.
4 Reasons to Change Ownership Shares in Your Small Business
You decide to invest more money into the small business
Here’s how a scenario like this might happen. Let’s say you launched your small business with two friends or colleagues. Initially, the three of you ponied up equal amounts to start the company. But that was two years ago, and now the firm needs another cash infusion in order to continue growing. You’ve discussed this with your partners, but neither of them have the money. You, on the other hand, have the funds and wish to put your cash back into the business. In return for your investment, however, you’d like a larger percentage of the company (change ownership shares). If you and your co-owners are able to work out an agreement, this may result in a higher ownership stake for you.
You decide to work full-time at your company
If you spend more hours working at your small business than your partners, this may give you an incentive to ask for more of the company’s profits. Take a look at this example. Up until now, you and your partners have been running the small business as a side hustle. All three of you work at other full-time jobs and you each own about 33.33% of the company. For your first year in business, you haven’t been able to afford to leave your job and neither have your partners. But, you’ve been saving money and you got married, giving your household a second income. You have decided that now is the time to take a risk, quit your job, and work at your business full-time. You discussed this with your partners, and all of you have decided that you should own more than one-third of the company in exchange for your sweat equity.
You work for a small business in exchange for ownership shares
In this particular situation, perhaps you have perhaps recently started doing project work at a startup in addition to your day job. With limited funds, the company offered you ownership shares in exchange for your skills and work. You may have a smaller stake than the founders of the company, but if you start spending more hours at the business, you can always ask for more shares.
You think that it might help you get funding
If you’ve funneled all your available cash into your small business, it may be time to take out a small business loan. Before you do this, however, it’s important to understand that a prospective lender will generally look at the financial qualifications of all owners with more than a 20% share in the company. Along with this, the lender will typically look at all of the owners’ credit scores.
For many loans offering lower interest rates, you’ll need to have a credit scores of 620 or higher. This means that if you meet this threshold and your small business partners don’t, you may think it’s a good idea to change ownership shares so that only your credit is examined. However, you may want to think again. Changing ownership percentages just to qualify for a better loan isn’t always a wise move, especially if your capital investment or sweat equity in the company is exactly the same as it was before starting the loan process, says Anna Dodson, a partner at Goodwin Procter LLP.
Instead, you may want to consider another form of funding: Invoice financing. With invoice financing, you get cash advances on your unpaid invoices. This can improve your company’s cash flow, manage your expenses and augment your working capital without worrying about needing to change ownership shares just to qualify for a decent loan. With invoice financing, you also won’t have to go through a lengthy loan approval process or worry about your credit score in order to get funding.
It’s easy to get started with invoice financing through Fundbox. Here’s how it works:
Register for free.
You’ll need your business name and business email to register.
Click to connect your bookkeeping app.
Fundbox supports a number of different accounting platforms. By integrating with your accounting software, Fundbox’s technology assesses your small business and determines if we are able to offer Fundbox Credit—no personal credit pull needed to get started. If approved, you could qualify for up to $100,000 in Fundbox CreditTM.
Choose which invoices you want to advance.
Your available invoices will appear in your Fundbox dashboard. Select the unpaid invoices you want to advance with the click of the mouse or a tap of the finger. Unlike traditional factoring, you have the control to choose precisely which invoice to advance.
Start spending your cash.
The full value of the invoice—100%—will be sent to your business bank account in as soon as the next business day.
Repay the advance over the next 12 or 24 weeks.
Depending on your preference, you can choose between 12 or 24-week repayment terms. Fundbox automatically debits a portion of the amount advanced, plus a small fee, each week. You’ll see both the weekly and total fees before you confirm the advance. Best of all, you can repay early without any early repayment fees—and all remaining fees will be waived.