Identifying the right sources of finance for your business is important. It does not matter if you have been running your business for 50-years, or just started last week. You need to know where the money your business requires is going to come from.
Whilst having a predictable stream of customers helps, it is not always enough. Sometimes the market slows down, or maybe you are growing too fast. In both cases, you need to have access to finance options which can help to keep your business running smoothly.
With that in mind, I wanted to take a look at how you can find the right sources of finance for your business. Some of these options require planning ahead (e.g. savings), while others require having connections with qualified investors in your area.
The key is knowing which source is right for the situation. As the saying goes – a tool for every purpose, and a purpose for every tool. You have to think of financing in the same way. After all, you would not take out a short-term loan for a long-term project. So understanding the best fit is important!
Regardless of your situation, a key part of any financing plan for a business is how you can generate what is known as free cash flow (FCF). This is the cash your business generates after paying for its day-to-day operations and investments. Once you have reached a point where your business can generate FCF, then you need to have a plan for what you are going to do with those funds. One plan is to park the money in an interest-bearing account which can be easily accessed in the case of emergencies.
Remember having a savings plan requires a lot of hard work and dedication. First, you need to be disciplined enough to stick the plan. Secondly, you need to find a way to make the money work. In today’s low rate environment this can be difficult and some which try to make the case that it does not make sense to have a savings plan.
But don’t be fooled. You are not running a multinational with billions in the bank. Your business is fighting every day for survival. So having 6 months, or more, of cash on hand is just good business sense.
If you have ever seen CNBC’s Shark Tank, then it is easy to fall for the illusion of having a billionaire investor on your side. The reality, however, is far less glamorous. Most companies who seek early-stage investment fail, and the time and effort to find an investor is often a major distraction from running a business.
That being said, there is a place for early-stage investment. Especially if you have proven your concept and need the capital to grow really big. Just remember that investors are driven by returns of 30% or more. As such, finding an equity investor is often more expensive than taking out a loan.
This is actually a very broad term used to cover a number of finance solutions from purchase order finance, inventory finance, lines of credit, and working capital finance to name a few. It is called alternative finance because most of the sources in this space are non-bank lenders. Some of these lenders, such as Mulligan Funding in San Diego, offer a wide variety of programs. Whilst other lenders specialize in certain programs such as merchant cash advances or trade finance.
Even though these lenders are labeled ‘alternative’, there is nothing out of the normal about what they do. In fact, this is the fastest growing segment of lending to small businesses in the U.S. and even the big banks are starting to take notice.
This brings us to bank loans. Once the only option for small businesses, banks have become a less popular source of finance in recent years. Part of the reason for this is the cost for a bank to originate a small business loan. As such, banks have been trying to push small businesses to apply for credit cards instead of loans. However, this locks out business owners with distressed credit and the cost of carrying credit card balances can be 20% or more.
Finding the right source of finance depends on the purpose. Other options include crowdfunding, which is a great way to raise capital to finance your next big idea, friends and family, and even micro loans. Each of these options has their purpose and the key is to know what you need the funds for, how long it will take to pay it back, and how much you can afford to repay.