How to Know If You Need Funding (and How to Get It)

Small business owners are more optimistic than ever about growth, but they’re also feeling the crunch that comes with a lack of capital. This is only exacerbated in today’s inflationary environment, with 92% of small business owners affected by rising costs, according to business.org.

Here are some highlights from our latest access to capital research:

• 51% of homeowners have opted for some type of financing in the last year

• 41% state that their application (or at least part of it) was not approved

• 37% have grown their business with personal savings more than with any other form of financing

• 61% of homeowners use a personal credit card to fund businesses

• 89% say access to capital limits their growth potential

As a multiple bootstrapping entrepreneur, I firmly believe that limited capital forces executives to make tough but important decisions about where to spend money, ultimately leading to stronger and more tax-resilient operations. But it can also severely disadvantage a company when capital is available So limited in that it blocks opportunities to experiment, test new markets and take risks. The adage “it takes money to make money” is true, but finding capital can be confusing or even seem out of reach when you’re in survival mode.

When I started my first business in 2005, I invested every dollar I’d saved in four years as an investment banker without realizing there were other sources of funding. Covering growing business expenses while managing personal expenses led to increased credit card debt and eventually to the difficult decision to sell my home after the mortgage came due and I had no way of paying it. That was a wake up call!

I understand: there is fear associated with borrowing to fuel a dream. While leverage or venture capital may not make sense for every business owner or at every stage of growth, let’s cut through some conceptual red tape.

Here are some signs that you should seek financing.

1. You must pay bills before generating income

According to our data, 69% of owners who requested financing in the last 12 months wanted to cover operating expenses, and 52% wanted $25,000 or less. Many business models – such as construction, retail, and technology – require the purchase of products or investments in services before revenue can be generated. On the other hand, if there’s a commitment (or even a high probability) of revenue, it just makes sense to take on additional risk to drive growth.

Generating revenue and smoothing disruptions in cash flow is hard enough during boom times, let alone when newsfeeds are churning non-stop with headlines about bear markets, inflation and a resurgent pandemic. This makes it all the more important to redouble your understanding of financial fundamentals like return on sales, gross and net profit margins, and net cash flow. What amount do you need to survive the next few months to a year? Put a real number on paper and look for financing options with lower interest rates to limit outstanding debt. A few options:

• Traditional bank loans: The approval process typically takes less than a month, but a strong personal credit score (720+) is required (we found that only 50% of homeowners surveyed had a score above 680).

• SBA Loans: A better option for owners with less than a year of history and income, but can take more than 90 days to be approved.

• Friends and Family: If your credit rating is holding you back, finding a co-signer or close contact to lend you money may be your best option.

However, remember that if you have no future revenue commitments, growth has slowed, and/or spending is outpacing cash inflows, it’s time to reset the business model fundamentals. Finding outside capital is meant to fix a temporary situation, not to hide fundamental flaws.

Related: The basics of money management

2. You need to make a large purchase

We found that 68% of owners who applied for financing in the last year wanted to expand a business, pursue new opportunities, or acquire business assets. Whether you need to invest in equipment, inventory, or tools needed for things like digitization and expansion, prioritize the big elements that will help achieve those goals and come up with a hard number before seeking funding. Also, understand the impact a large purchase will have on sales. How long does it take to get back the funds I borrowed or invested? How will it help you scale your business? Finally, are there any alternatives (like renting or borrowing) that you should explore before fully investing?

For many owners, credit cards are a good option for these types of purchases. In fact, we found that 90% of homeowners without a business loan believe that a business credit card would have a positive impact on their business. Many cards even offer interest-free deals for the first three to 12 months, like the popular Chase Ink Business Cash Credit Card or the new Hello Alice Small Business Mastercard, which offer more wiggle room to pay for a big purchase (and boost your credit score) . Score) without costly interest.

Related: 10 essential startup costs and 10 to avoid

3. You are ready to hire

Of those owners who plan to raise funds this year, we found that an overwhelming majority (72%) plan to do so to hire new employees and will request more than $25,000 to do so. A traditional bank loan, line of credit, or SBA loan are the best options here for most small business owners, but again, make sure you have a handle on your financial health and budget, including strong personal and business credit ratings and recent closing dates, including balance sheet, income statement and bank statements.

While cash advances might seem like a sexy option to get cash fast (especially if you don’t have strong credit), the risks associated with short-term financing could be multiplied interest rates – not least APRs that can climb into the triple digits more harm than good.

The venture capital option

Finding venture capital isn’t for everyone, but if you’re a high-growth company in need of large-scale funding, it might be time to create a pitch deck, improve your vision, and put yourself in front of some investors.

According to a recent Harvard Business Review study, 30% of VC deals come from leads provided by former colleagues or work acquaintances. As such, it’s important to build those personal/professional relationships while putting yourself out there — even more so for women and people of color, who historically make up a tiny fraction of VC funding recipients.

Related: The only advice women need to raise capital

Scholarships can also help, and at Any stage of the game

Although debt and venture capital come with risks, no matter what your funding journey is, I encourage you to apply for a grant. More than ever before, public and private grants are available to small businesses to refine their vision, clarify financial reports, and learn how to better identify and communicate their financing needs — especially for women, people of color, veterans, and the LGBTQ community. community.
Our data shows that 85% of homeowners want to apply for a grant this year, but 47% don’t know where to apply. The Hello Alice Small Business Funding Center and SBA.Gov are great places to access various resources in this area.

Here’s to fair access for every entrepreneur with a big dream and the will to work for it!