Show Me The Money – Part Deux

By Danna Olivo
Show Me The Money – Part Deux
June 9, 2022

Funding is a crucial part of any business’ success. Unless your balance sheet shows a massive cash hoard like Apple’s, at some point, you must answer funding questions if you’re planning to expand your business or just to make it financially stable.

When do you need additional financing?

Business growth happens in five consecutive stages. Let’s compare it to birthing and raising a child. During any or all stages an entrepreneur may be looking for funding to manage the growth process.

• Napkin Stage – This is conception. The business is a spark in the eye of the entrepreneur. They have a vision or dream of what their business will be like.
• Proof Stage – This is the stage where the business passes the sniff test or NOT in the market (Is there a need? Is the price enough? Who are your competitors?) Is it worth the time and investment needed to pursue this opportunity?
• Build Stage – This is where the business model is developed, and the processes and methodologies are identified and proven. Think of this as the stage when a child grows and develops through the developmental years as he/she matures.
• Funding Stage – This is the stage when the child is ready to graduate and go out on its own and spread its wings. The business is ready to move into the next phase of growth (exponential scaling.) To do that requires equity funding, planning, and resource management…meaning MONEY!
• Growth Stage – this is the stage when the business grows exponentially. Profit margins increase as revenue dollars increase. The business may be able to run autonomously allowing entrepreneurs to relax and enjoy the fruits of their labor.

There are several reasons why a business needs to have a fresh influx of capital, and here are some of them:

Additional working capital

Having enough working capital is important when looking at a company’s financial health. Lack thereof may have a serious impact on the future of your business. Many businesses choose to apply for external funding to create enough working capital to enable them to fulfill their growth ambitions.

A loan can cover short-term funding requirements while giving the business the money it needs to grow or bridge the gap between customer orders and supplier payments to help the company meet its funding obligations.

Working capital also means that you will have additional funds to venture into new, potentially revenue-generating opportunities.

Asset purchase

Unless you’re content with your current revenues and output, it’s part and parcel of any company to have expansion plans. And part of any expansion plan is the purchase of assets.

Starting a business

If you’re in a business for too long, let’s say manufacturing, you’ll probably realize that some parts of your normal processes are better left with those you can control. So, it is quite normal for any business to control and build other businesses around their main ones.

Going back to the example, if you’re in manufacturing, you might consider building other businesses that aid in helping you with your raw materials or logistics.

Why is funding a bit of a challenge for startups?

Availability of funding sources may not be a problem with old, established companies, but it is quite a challenge for startups. According to a study, more than 75% of startups aged less than two years old, and more than 70% of businesses aged 2-5 years old have reported difficulty in getting funded.

More than half of startups have sought funding at some point, but only a little over a quarter of those who applied got approved. Out of those approved, a whopping 41% didn’t get the amount of funding they hoped for.

There are several factors why startups experience a certain degree of hardship when securing much-needed financing. Aside from age (which may be correlated with stability), some startups also fail to show how their business is scalable. Consequently, since they don’t have an idea (yet) how to expand their business, they also do not have an idea of how much additional funds they need. The worst kind is that they don’t know what to spend on.

Lenders are also looking out for returns, so if they think that your company might not be able to deliver, then it would be natural to get declined.

Types of financing available

The good news is that this article will set out the common ways you can consider getting some additional funding:

Self-funding

The best (and the cheapest) option for funding your business is using your savings. This will give you peace of mind knowing that despite having “skin” in the game, you won’t be saddled with loans to pay in the event the business goes under.

Some entrepreneurs who have resorted to self-fund their businesses say that they’re more driven knowing that “it’s all or nothing”. Since they’re staking their wealth on the line, they don’t have a choice but to work hard and smart to get back capital.

Debt-funding

Banks

If you’re one of the few business owners who have a stellar credit score from the start, then one practical option for you is to get some bank-funded loans. A traditional business term loan is the easiest type of debt financing to understand because it’s probably what you naturally think of when you think of a business loan.

You borrow a fixed amount of money, usually for a specifically stated business purpose. Then, you pay back the loan over a fixed term and typically at a fixed interest rate.

Small Business Administration (SBA)

There are three types of loans that the SBA offers:

7(a) program: The most common SBA loan program, the 7(a) loan program, offers loans up to $5 million to be used for a wide variety of purposes. Use our guide to learn more about the SBA 7(a) loan program.

Microloan program: The SBA microloan program provides financing opportunities for entrepreneurs needing between $500 and $50,000 in funding. Designed for newer businesses, the SBA microloan program is one of the best forms of debt financing for startups. Learn more about the SBA microloan program.

CDC/504 program: The SBA’s CDC/504 loan program is designed for businesses looking to make a major fixed asset purchase—such as large equipment, land improvements, or the purchase or renovation of an existing building. Borrowers through this program can take out up to $5 million, with repayment terms of up to 20 years and interest rates based on current treasury rates. Use our guide to learn more about the SBA 504 loan program.

Equity funding

Angel Funding: Compared to Venture capitalists, angel investors may offer more flexible investment terms compared to venture capital firms. Angel Investors are known for putting up a significant amount of money in exchange for equity in the startup.

Angel investment may be too much for a small shop owner, but small plant owners, tech startups, or firms can take advantage of this source.

Since you’re giving up a portion of your company’s ownership, this may not be the best option if you’re conscious of that. Especially since they will also become part owners, they will certainly have a say in how the business is run. They’ll be highly interested in your exit strategy, as they will make most of their money when your business is sold. So, we suggest you carefully screen who you let in your company.

Venture Capital: Venture capitalists are similar to angel investors. However, since they operate as a group, they tend to infuse a larger amount of capital than angel investors (think of $2 million and up). Being professional investors, they can guide you in growing your business. They’ll also probably be interested in having a say in how your business operates.

Keep in mind that venture capital firms will invest at a point when injecting more capital into your business will result in further growth and more profit.

Crowdfunding: If you don’t like opening a large chunk of your business exclusively to one angel investor or a venture capital firm, you can investigate crowdfunding instead. In crowdfunding, a community of small investors puts up funds and invests them in your business. Since their shares are too small to have a say in how things are run in your company, having them individually won’t be as challenging operation-wise.

However, since you will be in debt to a LOT MORE people, you will have to be a bit more transparent with your campaigns and make them measurable and understandable. Having a well-established network of friends and professional contacts can increase the chances of a successful campaign.

Factoring (receivable financing): Factoring is a financial transaction and a type of debtor finance in which a business sells its accounts receivable to a third party at a discount. Sometimes, a business will factor its receivable assets to meet its present and immediate cash needs.

For example, you’re working on the construction. You have accounts receivable from your client worth $100,000. But to work on that project, you need additional capital that you don’t have now. This is where factor funding comes in. You sell your receivable for a discount, and in turn, you get the funds you need to start on the project.

Mezzanine capital: Mezzanine capital is like combining the best out of equity and debt financing. What happens is that banks usually do not lend money to businesses that just started, right? They just do not have enough information for the bank to make an informed decision. With Mezzanine capital, you can get financing from banks despite not having the requisite “business maturity,” but this is the tricky part—you must relinquish a bit of your equity.

It’s a fair exchange if you ask our opinion. The downside of this arrangement is that the interest rates might be a bit high to make up for the risk that the banks are taking. However, we maintain that this funding option is still one of the best out there.

Bottomline

There are a lot of practical funding options for any business owner. It’s up to you to determine which one suits your needs best. MarketAtomy has a FREE eBook entitled the “Business Funding Resource Guide,” highlighting the 7 Steps to understanding the SCIENCE of Business Funding. Head over to Marketatomy.com for our latest business blogs and articles.

Next blog we will be discussing when to know you are ready for funding. Stay tuned.

Danna Olivo is a Growth Strategist, Author, and Public Speaker. As CEO of MarketAtomy LLC, her passion is working with first-stage business owners to ensure that they are prepared and equipped to launch and grow a successful small business. She understands the intricacies involved early on in business formation and as such the challenges that come with it. A graduate of the University of Central Florida’s College of Business, Danna brings more than 40 years of experience strategically working with small and medium businesses, helping them reach their growth goals. danna.olivo@marketatomy.com