It takes money to make money. Owning a small business isn’t easy, especially in today’s volatile economic climate. Growing that business to the next level may require an infusion of new capital. Don’t look at this as borrowing money. You’re investing in your future, especially if you’re expanding online.
There are multiple ways to obtain small business financing. Before you attempt any of these, make sure you have a solid business plan and recorded revenue. Every lender will ask you for those, regardless of what the financing arrangement will be. Get your paperwork in order. Don’t go in unprepared.
Option #1: Visit your local bank or credit union.
This may seem like the most obvious choice. Give it a try if you like. Since 2008, only about 20% of small businesses going this route have been approved for funding. Banks simply aren’t lending in this space. The risk is high. Collateral is often non-existent.
Interest rates might be low right now, but transaction fees and closing costs are high. Typical fee structures for small business loans include a 3.5% closing cost and usually a standard bank fee of up to $500. Add all that up and maybe the bank is not your best option.
Option #2: Find a venture capitalist to invest in you.
This should really be your primary option, but most small business owners need to go through the bank experience before they get here. A venture capitalist (VC) can provide you the funding you need to expand in exchange for an ownership stake in your company.
What’s important to understand in this scenario is that a VC brings more to the table than just money. As a part owner of your company, a venture capital firm will also share their experience, making this a value-added lending effort. That will help you scale more efficiently.
Option #3: Seek out strategic partner financing.
Partner financing is similar to venture funding, but the partner may receive royalties on your product line in lieu of equity. In exchange, the strategic partner will provide access to their customer base and marketing resources. There are numerous ways you can structure that.
In most cases, this type of lending is done by larger firms in a space looking to grow by funding smaller distributors and manufacturers. There are also scenarios where exclusive rights on one of your products or services is offered as part of the deal.
Option #4: Search for an angel investor.
Angel investors are not venture capitalists. That’s a common misconception. VCs are companies with guidelines for investing that include demonstrable growth. An angel investor is usually an individual willing to invest in a small business or start-up firm with potential for growth.
It’s easier to meet the criteria for angel investment. That means the pool of companies seeking this type of funding is much larger. You’ll need to find a way to distinguish yourself from your competitors if you hope to win some funding in this space.
Option #5: Look into factoring or invoice financing.
Factoring is an option to cover short-term expenses, not a plan to scale your business. You’re basically using account receivables as collateral to infuse working capital into your company. That sounds great, but all you’re doing is getting paid sooner on existing money owed.
This option can be useful if you need to offer longer payment terms to your customers. Service providers are a good example of this. Contracts with net 30, 60, or 90 can stifle cashflow, particular after a slow month or two. That’s where factoring becomes a good option.
Option #6: Give crowdfunding a shot.
Crowdfunding is a financing option for those not established enough for venture funding or strategic partnership. It’s popular with start-ups, providing them an entirely new sector in small business financing. Thousands of new firms have gotten seed money this way.
The dominant players in the space right now are Kickstarter and Indiegogo. You can list your business with either or both and tap into funding offered by a “crowd” of non-VC investors. Make sure you read the fine print. Terms and conditions on these deals can be tricky.
Option #7: Offer future equity through convertible debt.
Convertible debt is a level above everything else on this list. You should not try this without consulting an accountant or financial professional beforehand. On paper, it looks simple. Borrow some money. Pay interest on it for a set period. Convert the debt to equity.
It’s basically a bond arrangement. The difference is that you’re ceding a certain amount of control of your company at the end of the term. That’s where the professional advice comes in. This type of financing is more complex than others, so careful planning is required.
Addendum: Value isn’t measured in dollars and cents.
Growing your small business doesn’t just require capital. The search for financing should be about more than that. Value is measured by what the lender brings to the table. Banks only offer money. Venture capitalists bring resources and experience. Strategic partners have valuable contacts and marketing tools.
Flynn Creations LLC can refer you to a range of small business financial solutions. We can also upgrade your online marketing. Reach out if you’re looking for capital infusion, coupled with the experience and knowledge to grow your firm correctly. Use the form on our Contact Page to request additional information.
Kevin D. Flynn is the founder and CEO of AdvisorScale Financial Writing. When he’s not writing or on the golf course, he spends his “free” time designing WordPress websites or creating business sales processes for start-ups. In addition to AdvisorScale, Mr. Flynn is also the Executive Director of H.E.L.P. for Young Readers and Managing Editor at October Golf Magazine. He lives in Leominster, Massachusetts, with his wife Evelyn. They have four adult children, two cats, and eight wonderful grandchildren.
