There is little room for error when financing small and emerging businesses — it is important to evaluate the benefits and downfalls of each option to determine if they’re right for your company as they affect your cash flow, taxes, operations, and competitiveness very differently. Of course, customers are the best capital source, however, pre-revenue startups, high growth, and seasonal companies often need external financing.
Venture capital & angel investors
Making a big splash, tech startups often raise millions through venture capital (VC) and angel investors; however, less than 1 percent of all businesses raise capital this way. These are a better fit for hyper-growth companies with little or no collateral, unpredictable cash flow, and large capital needs with plans for large exits within seven years. VCs and angels bring industry connections, management expertise, and credibility. Unlike debt financing, which businesses repay with interest, this equity financing doesn’t affect daily cash flow.
VC funding is difficult to obtain, and you should be ready to relinquish equity and control. It is no longer just your company; subsequent rounds dilute ownership. VCs appoint seats to your company’s board of directors — many investors are actively involved, and if enough lose faith in you, they can fire you.
You’ll feel pressured by their expectations of returns on investment. As your company grows, maintaining this pace is challenging. With every round, investors expect the value of their equity stake to grow. Be prepared to devote a lot of time to raising equity financing.
Accounts receivable financing
Accounts receivable financing is one of the least understood financing options. Simplified, you sell to customers and bill them. Then, instead of waiting on payments, an accounts receivable financing partner pays you quickly for those invoices, which helps you maintain consistent cash flow, make payroll, buy supplies, and more. It frees you from collections as the financing partner collects payments from your customers, increasing your efficiency.
Accounts receivable financing can help businesses that sell to established customers with good credit but long payment terms, like Fortune 500 companies and governmental agencies, because their credit history is more important than yours. Also, an experienced accounts receivable financing partner can help you evaluate potential customers, avoiding those with poor credit.
Not all accounts receivable companies are created equal, so evaluate them thoroughly. For instance, First Business Growth Funding is owned by a publicly traded financial institution, which is federally regulated. Rushed, one-off deals with less-than-reputable providers tarnish this industry, so read all paperwork and understand all terms and fees before signing.
People often think the U.S. government funds Small Business Administration (SBA) loans, but the SBA is a governmental agency that provides banks a guarantee of up to 75% of SBA loans. Business owners work with banks to secure SBA loans. The SBA guarantee helps banks feel comfortable lending to businesses they may not otherwise consider because of collateral shortfall, limited credit history, or longer amortization. Businesses with healthy, predictable cash flow and a proven management team are good candidates for SBA loans, even with limited collateral assets. SBA loans can be used for a variety of business purposes, such as establishing new businesses, acquiring existing businesses, long-term working capital, purchasing inventory, purchasing equipment, refinancing existing debt, and more.
As with any loan, you must make regular loan payments and adhere to the loan covenant. Many SBA loans also require a personal guarantee and personal real estate assets. Owners must be actively involved in running the business to obtain an SBA loan, and, for real estate deals, the business must occupy at least 51 percent of the square footage.
When researching the right SBA lender, start with banks that have earned the Preferred Lending Partner (PLP) status from the SBA for assurance you’re dealing with experts.
The right financing can launch your company’s growth, just as the wrong one can hold you back. Make sure you understand your business model, strategy, and stage of development, and your business goals and desired trajectory for the next five to seven years. Find reputable partners who can provide a wide range of options, resources, and objective advice to get the most favorable terms for your business.