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Assets = Liabilities + Equity

Note:

Unlike liabilities, equity represents ownership in the company. So, if a company owns $100,000 in assets and $50,000 was funded by loans, then the owner still holds claim over $50,000 in assets, even if the company goes out of business, requiring the owner to give the other $50,000 in assets back to the bank. For corporations, the equity funding varies a bit, however, because the owners of a corporation are the stockholders. The equity funding of corporations comes from the initial sale of stock, which exchanges shares of ownership for cash to be used in the company.

The rest of this chapter discusses the two main ways businesses raise capital.

Regardless of what the money’s for, when a corporation wants a loan, it starts by putting together a proposal. For startup companies, this proposal comes in the form of a business plan, but anytime a corporation receives a loan significant enough to influence the capital structure of the company (not lines of credit), it has to present a proposal for the use of the funds. This proposal includes financial information about the corporation, including detailed predictions for future financial well-being, called projections, that prove the company can pay back the loan on time and without risk of default. For more information about business plans, which you can use in many forms of proposals, you may want to read Business Plans For Dummies (Wiley Publishing, Inc.) by Paul Tiffany, PhD, Steven D. Peterson, PhD, and Colin Barrow.