Whether you’re launching a new business or taking your business to the next growth stage, finances play a key role in determining how much you can accomplish. Understanding and assessing the various funding options can inform your business planning and set you up for success.
If you’ve chosen to bootstrap — i.e., self-fund your business venture — external funding may not yet be an issue for you. Perhaps you’re using savings, working a second job or selling assets. Depending upon the type of business you have, these can be viable options. However, personal funds can be limited and there may come a time when additional finances are needed. You may also find that recruiting investors supports you in ways beyond just finances. When investors believe in your vision, they may become your advocates and mentors.
[Read: Bootstrapping vs. Venture Capital: Which is Right for Your Business?]
As every business goes through many stages from start up through growth and perhaps even to selling or IPO the capital required varies, as do the sources available for that capital. For a comprehensive view of funding, we’ll look at when to seek out investors, the types of loans to apply for and ways to maximize your cash flow.
Getting prepared to raise funds
Whether you want to apply for a loan, pitch investors or try out online crowdfunding, there are steps you can take to prepare yourself for the process. Your first step will be to understand funding options. Some next steps can be:
- Establishing good personal credit: Lenders and investors want to see how you handle your money.
- Having a solid business plan: Your plan helps bring clarity to your vision, defines goals and details your financial strengths and needs.
- Knowing your numbers: Lenders and investors want to see that you understand your finances and can clearly articulate them.
- Preparing a good pitch: You’re not just pitching a business idea; you’re pitching a business deal.
[Read: Does Your Business Need Funding? Do These 5 Things First]
Pitching investors
In your preparation process, you’ll want to assess which types of investors are likely to invest in your business. Here are a few to consider:
Crowdfunding
Crowdfunding makes it possible for nearly anyone to invest in your business. You raise funds through many small investments via an online platform. There are four types: equity, donation, rewards and micro-lending.
[Read: Everything You Need to Know About Crowdfunding]
Angel investors
Angel investors use their own money to help startups overcome early stage challenges and may provide more favorable terms than those offered by venture capitalists (VCs). [Read: How to Choose Between Equity Crowdfunding and Angel Investments]
Venture capital
If you’re in a disruptive industry, have a proven business model and have high start-up costs, you may be a good candidate for venture capital. Keep in mind that VCs generally look for high-profit potential and quick returns on their investments. [Read: Three Things You Need to Know About Raising Venture Capital]
If you decide to pursue investors, there are several types to consider. Learn who aligns with each stage of your business so that you pitch the right people at the right time.
[Read: Business Investors: A Guide to Knowing When and How to Find One]
Finances play a key role in determining how much you can accomplish.
Looking for lenders
While it may seem that venture capital is like a golden ticket to success, it’s not right for every business. In reality, few businesses receive venture funding and yet many still identify paths to financing and success. Loans can be an alternative or additional source of funding.
There are many types to consider and not all will align with your business type or your needs. Here are several to learn about:
- Working capital loan: These loans are used to fund everyday business expenses and are mostly available through online alternative lenders.
[Read: What Is a Working Capital Loan?] - Short-term loan: This option provides quick cash for a temporary business capital need with terms mandating quick repayment. There are several sources for these loans. Be careful to understand terms and interest rates.
- SBA loan: The U.S. Small Business Administration (SBA) offers loan options for eligible businesses.
[Read: What Is an SBA Loan?] - Bridge loan: Bridge loans are expensive and intended to fill a gap while a business awaits other financing that enables them to pay the loan off and support continued growth.
[Read: How Bridge Loans Bridge the Gap Between Financing and Business Growth] - Secured business loan: Secured loans can offer more attractive interest rates and payment terms because they require that a business “secure” them by providing collateral, which guarantees the lender a way to get their money back.
- Seller/owner financing: If you’re purchasing an existing business, the seller, i.e., the current owner, may loan you the money to finance the purchase.
[Read: How Seller Financing is Modernizing Entrepreneurship] - Business equipment loan: This loan provides the capital to lease or buy the equipment you need to run your business.
[Read: Is Business Equipment Financing Right for Your Business?]
Lenders have criteria that you’ll need to meet. To assess the likelihood of getting a loan and to prepare yourself to apply, you’ll need to understand what lenders will look at. The five C’s can serve as your guide:
- Your Character.
- Your business’s cash flow Capacity.
- The Capital you’ve invested in your business.
- The Conditions surrounding your business.
- Collateral that you can offer to secure your loan.
Optimizing working capital
While there are times when you’ll need outside funding to reach your business goals, there may also be ways to manage your money that will free up more of it to grow your business. Some of these include:
- Increasing your working capital: There are several ways to increase your working capital, i.e. improve the ratio of your assets to your liabilities. Possibilities include reducing overhead, increasing profit margins and converting debt from short-term to long-term.
- Implementing management accounting: Management accounting is a practice of reviewing financial and statistical information that enables management to make wise decisions with an understanding of the current financial situation and reliable projections for the future. Reports look at available cash, sales revenue and accounts payable and receivable. This can enable you to make adjustments that lower business expenses, project future cash flow so as to time expenditures wisely and reduce tax liability through strategic investment and spending.
- Factoring your receivables: Sometimes, waiting the 30 or 90 days allotted to a client to pay their invoice greatly constrains your cash flow, which then limits your ability to make investments to grow your business. A factoring company advances you the value of your invoice immediately. They hold the invoice as collateral while they await payment from your customer. They’ll charge you a fee, which generally ranges from 1% to 4% rate per 30 days.
[Read: Is Factoring Receivables Right for Your Business?]
With so many approaches to consider, it’s wise to understand your financial needs and your funding stage. This empowers you to confidently identify the right resources and provide valuable information to increase your chances to secure your funding.
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