Sources of Capital for Small Businesses
The classic entrepreneur grind or do-it-alone approach. Bootstrapping is building your business from the ground up with only your personal savings and (hopefully) the cash coming in from initial sales. It’s a grind—that’s for sure.
Bootstrapping is slow, risky, and limited. Limited cash restricts growth and can diminish the quality of the product or service. On the plus side, you have complete ownership of the business and little to no debt. However, bootstrapping is a long trail of blood, sweat, tears, and a fair amount of Top Ramen.
Also known as “love money,” this financing comes from family or friends—hence, the “love.” It’s still a form of debt, but the repayment terms are much more lenient. Lenient as in, “Mother, if you still love me, can you give me another 3 years to pay you back? Yes? You’re the best!”
Patient capital often has the following characteristics:
- No official signed contract
- Loose repayment terms in regard to timing, interest, dividends, etc.
- No company ownership gained by the lender
- No collateral necessary
- Debt forgivable at any time
It’s not a bad way to finance a business, but it’s not reliable. Unless your friends and family are outrageously wealthy, they likely have their own financial needs. Your company probably isn’t the most profitable investment they can make (no offense). Plus, mixing business with family doesn’t always play out nicely.
Venture capitalists (VCs) invest in startups and small businesses with high risk but the potential for exponential growth. If you’re looking for massive scale at a lightning-fast pace, venture capital financing is a good way to go. However, it’s not all roses and chocolates—working with venture capitalists can get a bit thorny.
First, while you might not be in “debt” to the VCs, they still expect to make a healthy return on their investment, which usually means they expect your business to IPO or be acquired. If that’s not your goal, don’t pursue venture capital. When you make a deal with VCs, you get financing and they get equity in your business. In some situations, VCs may even end up with more than 50% of the business, meaning they now control your company.
Giving up equity is almost always more expensive in the long run when financing your business. Yes, it may look like “free” money, but handing over equity costs you a percentage of your business—forever. A loan, on the other hand, will eventually get paid off.
Angel investors are generally wealthy individuals who invest their own money in startups and small businesses—not money from a firm. Angels typically are more willing to take on higher risks than traditional financing institutes like banks, giving new startups a fighting chance. Angels usually have a lot of experience working with different founders and their companies, so they bring a wealth of business expertise to the table.
Like VCs, angels expect equity in the business. They want to benefit from the business’s success, and they usually want to have a certain level of involvement in the direction of the company. That means your business is no longer your business—ownership is shared.
Crowdfunding is a relatively new phenomenon that allows entrepreneurs to harness the power of the internet to raise funds for their business. Small businesses sign up on a crowdfunding platform, explain their product, and set a financial goal. Interested customers “invest” cash donations to the cause, either in exchange for rewards, equity, or good-Samaritan points.
Sounds easy, right? Just post your financing needs on a site, offer a few modest rewards, and voilà—oodles of cash begin to fill your bank account. You don’t have to be a cynic to realize it can’t be that simple. Getting thousands of strangers to donate to your project or business requires the same care, preparation, and execution as any prolific marketing campaign. And that’s far from easy.
And then you have debt financing, which entails borrowing money and repaying it with interest. Your mind might have jumped to a traditional business loan from your local bank—but it’s much more than that! Debt financing includes a variety of loans that businesses can choose from to secure funding: bank loans, business credit cards, lines of credit, equipment financing, SBA loans, factoring, and more.
With debt financing, you retain complete control of your business. Your lender offers you capital, but they have zero say in the day-to-day operations of your business. Yes, you must pay back the money you borrow and usually a fair share of interest, but then whatever you financed is 100% yours. Oh, and interest on some loans is tax-deductible, too.
Most importantly, debt financing is easier to acquire and more accessible than any other source of capital. Not many people have adequate personal funds sitting around or rich uncles bestowing “love money” to fund their business. And venture capitalists and angel investors typically reserve their investments for hotshots like Grubhub or Spotify. Debt financing, however, is available to businesses big and small, new and old, pretty and ugly.
Debt financing does come with a bit more risk, though. If you fail to pay back the loan, lenders could seize your business or personal assets. Not cool. Also, some loans have terrible interest rates that’ll eat your monthly cash flow.
Obviously, we’re huge fans of loans—it’s who we are and what we do. Below, we’re going to cover how different loans can help your growing business overcome a variety of challenges. Whether you’re hiring the A-team, sprucing up the office, or launching the next hot marketing campaign, here are the top financing options at your disposal.
Top Financing Options for Business Growth
Consider the following guide your treasure map. Literally. It’ll take you on a journey from no cash to “X” marks the spot. Use it to identify your business growth demands, then choose which financing option(s) will best serve your needs. Simple. No more headaches, no more sleepless nights, and no more growing pains—all you need is the right loan product for the right situation.
1. Financing Options for Growing Your Team
Finding, recruiting, onboarding, training, and paying a new employee is expensive. It doesn’t matter if it’s employee #2 or employee #22, the costs can quickly add up. But that doesn’t mean you should go it alone—it just means you might need a financial shoulder to lean on for a time.
Yes, hiring an employee takes some cash, but after a bit of onboarding, their work begins to pay for itself. To help you get over the initial hiring costs or cover payroll during lulls in cash flow, consider the different loan options available.
Business Line of Credit
A business line of credit is the perfect financing option for growing your team. You can borrow from your line of credit to bring on extra hands without eating into your cash flow. Then, when you repay the line of credit, you only pay interest on the funds you borrowed. It’s a quick and easy way to bring on seasonal help or recruit new employees.
Merchant Cash Advance
If money is short and you need an employee working to generate the revenue that’ll pay their salary, consider a merchant cash advance. You get immediate cash by agreeing to give a portion of your future sales to the lender at a discount. This financing option is great for businesses with less than stellar credit that need capital ASAP.
2. Financing Options for Expanding Your Locations
Eventually, every growing business will need to expand its real estate footprint. Building out your business location is a strategic way to develop your assets. Every renovation, upgrade, or expansion not only adds value to your property, but it also provides the space you need to streamline operations and attract more customers.
However, real estate is notoriously expensive. Whether you need a second location to accommodate customers or you need to renovate an existing space for your expanding team, financing is available to help.
You can use a commercial mortgage to buy, build, expand, remodel, or even refinance. It’s a flexible financing tool for businesses young and old. New to the entrepreneur life? Use a commercial mortgage to cover the down payment for your first location. Own a thriving restaurant business? Use a commercial mortgage to open up a second location for your die-hard fans in the neighboring town.
The US Small Business Administration (SBA) is a federal agency dedicated to helping small businesses get the capital they need. The SBA has 2 great loan programs that you can use to expand your location: the SBA 7(a) and the SBA 504 loan.
With a 7(a) loan, you can buy land, cover construction costs, repair and renovate an existing business, and more. If you have big aspirations and meet all the requirements, you can get a 7(a) loan for up to $5 million. Yeah, that’s a lot of cash!
SBA 504 loans are a bit more complicated than 7(a)s and can only be used to finance fixed assets. Fortunately, commercial real estate and certain kinds of equipment fall into that category. With a 504 loan, you can purchase an existing building, build a brand new facility, make improvements to your current property, and more.
3. Financing Options for Equipment Upgrades
Equipment can get real expensive, real quick. Repairs to your company vehicles or even a new backhoe could cost more than the business makes in a month. To keep your business operations and cash flow running smoothly, you may need a little financing help.
Whether you need a new backhoe or a credit card processing app, equipment financing has you covered. Gizmos and gadgets, whozits and whatzits, even thingamabobs—whatever your business needs, there’s an equipment financing option.
Plus, a significant benefit of equipment financing is that your equipment can also act as your collateral. That means you can secure a killer loan without draining your bank account or risking your spouse’s wedding ring. And because the collateral is part of the loan, approval is easier than you’d think.
That SBA 504 loan we mentioned before also works to finance expensive assets like equipment.
Business Line of Credit
For less expensive equipment investments and repairs, consider using your line of credit. If the cost is high, look for alternative financing—you don’t want your line of credit permanently unavailable while it pays off a new food truck or tractor.
4. Financing Options for Boosting Your Inventory
Opportunity waits for no one. When your supplier has a sporadic sale or offers a significant discount, you need cash on hand to take advantage. When you need to stock up on inventory but are short on time and money, here are your top financing options.
Business Credit Card
For one reason or another, you may not qualify for a business loan—and that’s okay. A business credit card is another debt financing option that’s great for building credit, earning rewards and cashback bonuses, and enjoying perks. Plus, if you use it responsibly, your credit card is always there when you need to jump on time-sensitive deals.
Short Term Loan
If you’re low on cash, being able to access money quickly is a must. That’s where a short term loan can come in handy. When you need to beef up your business’s inventory, a short term loan can likely provide the necessary finances.
A short term loan is the stereotypical financing you likely think about when you hear the word “loan.” You borrow a lump sum of money to grow your business and make regular payments to pay back the principal and interest. Simple.
When it comes to investing in your inventory, short term loans are a great option. You get quick cash, bulk up at a discount, and then repay the loan with the resulting sales.
Accounts Receivable Financing
When time is of the essence, accounts receivable financing can help turn your IOUs into cold, hard cash. Instead of waiting around for your clients’ payments, accounts receivable financing gets you immediate access to cash by selling your purchase orders or receivables at a discount.
Often, you can save time and money by using accounts receivable to get cash-in-hand quickly. This option will keep your cash flow healthy and allow you to jump on any prime business opportunities at a moment’s notice.
5. Financing Options for Amplifying Your Marketing
Depending on the size of your marketing ambition, you can lean on a few different loan options.
Business Line of Credit
This ever-handy financing option can help you cover your marketing expenses without impacting your cash flow. Use the resulting sales to pay back the line of credit so you can keep this financing option available for all of your growth needs.
Short Term Loan
For more substantial marketing investments, a short term loan is a great option. With a bit of extra cash, you can guarantee high-quality marketing campaigns that adequately penetrate the market. The advantage of using a short term loan is that you’ll keep your line of credit available for other business needs.
Debt Financing: The Sky’s the Limit
Debt financing keeps you in the driver’s seat while supplying more-than-adequate cash to grow your business. Sure, there are other sources of capital available, but none offer the control, flexibility, and reliability of small business loans.
With so many different loan options available, the sky’s the limit to your financing needs. Growing your business doesn’t have to be painful—it can be strategic and intentional with debt financing. See how far a little extra cash can take your business.