Taking the next step in the life cycle of your business can be daunting, especially when you don’t have the funds to expand. It’s likely the most daunting choice you’ve had to make up until this point, and the wrong decision can stall your growth and allow a competitor to move into your market while you figure out a plan B. Your specific and individual business financing needs can vary wildly. You could be in the startup phase, expanding operations to a new market, or dealing with a federal economic policy change. Wherever you are, this guide has you covered.
Understanding the Financing Needs of Your Business
The first step is a thorough assessment of your business and its finances. There are three stages of a business’s life cycle, with vastly different financing requirements and optimal solutions. It can be tough to tell how much funding you may need or even the actual value of your business, which is why merchant services portfolio valuation companies exist. They can assist you with potentially obtaining financing by determining the exact worth of your recurring revenue streams.
Startup Phase
This is the very beginning of your business. You should be concerned with covering the initial startup costs to get the business up and running and become self-sustainable. These costs could include product development, obtaining equipment for manufacturing, various monthly costs (utilities, website hosting fees, employee wages, rent, etc.), logistical operations, or anything else your business will need in daily operations.
Growth Phase
Once the business has gained traction and begins to grow, you’ll need additional funding to expand your marketing, acquire employees, and scale up operations. The financing required in this stage can range anywhere from $250,000 up to $2 million+.
Maturity Phase
In this phase, your business is established, and your economies of scale are in full force. At this stage, you are looking towards expansion into new markets, acquiring competing businesses, or major logistical improvements (e.g., a purpose-built manufacturing plant, warehouses, storage, shipping, etc.). These expenditures could require millions of dollars in new funding.
Classic Financing Options
Bank Loans and Lines of Credit
Forms of traditional bank loans, which are a staple of business financing, include:
- Term Loans: A fixed loan amount paid back over a predetermined period. These are very common and straightforward, as they have predetermined payments for the entire load life, so you know exactly what your payment will be and when it’s due.
- Business Line of Credit: This offers flexible finance that allows you to borrow funds up to a predetermined limit as needed. Your payments will vary each month depending on whether you’re carrying a balance over from the previous month, and how much you added to (or deducted from) that balance in the current month.
- Small Business Administration (SBA) Loans: SBA loans are government-backed loans with favorable interest rates and terms, only available for small businesses.
While these options usually offer lower interest rates than alternative financing methods, to qualify for them, you will need a strong credit rating, an established business, and often collateral.
Financing Alternatives in the Modern Era
These options to secure funding for your business have only entered the mainstream over the last century. These financing alternatives can include:
- Angel Investors: Only applicable to early-stage businesses, angel investors can be family, friends, or wealthy connections in your network who can provide you with funding because of the challenges in obtaining a traditional source of funding. Angel investors typically request a percentage of ownership in the company, as opposed to a traditional repayment of the loaned capital.
- Venture Capital (VC) Firms: Funding from VC comes from a business that specializes in funding startup businesses in exchange for ownership equity, a substantial repayment in the future. The VC firm usually expects a return of 10-20 times their initial investment over five to seven years. They can also insist on hand-picking a CEO or CFO to run the business alongside you as a condition of funding, limiting some of your control over the company, while ensuring their interests are met.
- Crowdfunding: Kickstarter is the most well-known platform for this source of funding, but there are many other options offering different vehicles of return for the investor. This is a way to fund your business from multiple (a few dozen to several thousand) individuals, each contributing a smaller amount in exchange for a specific return. This could be access to the final product, becoming a shareholder, or receiving an interest payment.
Choosing the Correct Path For Your Business
When just establishing your business, you may have limited options for financing available and have to take what you can get. Once you’re able to choose between several options, you’ll need to consider the following factors to help you make the best decision:
- Total Cost of Capital: Consider the total cost of borrowing the money, including interest, fees, or even owner equity dilution.
- Control Implications: You may have to exchange X% of your company ownership for $Y amount of dollars.
- Compatibility with Business Model: Ensure that your repayment option aligns with your current (and future) cash flow.
Securing financing for your business isn’t just about obtaining additional funds to spend on various needs; it’s about setting up a stable foundation to ensure sustainable growth. The modern-day entrepreneur must adapt their financing strategies to their business and the modern environment. By choosing the correct method for your business, you’ll gain a competitive advantage over your competition and thrive in today’s challenging business environment.
You may also like to read,
