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Small business owners are more optimistic than ever about growth, but they are also feeling the squeeze from a lack of capital. According to business.org, this situation is only exacerbated in today’s inflationary environment, with rising costs affecting 92% of small business owners.
Here are some highlights from our latest capital access research:
• 51% of property owners sought some kind of financing in the last year
• 41% said their application (or at least part of it) was not approved
• 37% of businesses use personal savings to grow their business more than any other type of money
• 61% of business owners use a personal credit card to fund their business
• 89% claim that access to capital limits their growth potential
As a serial entrepreneur, I firmly believe that limited capital forces leaders to make difficult but crucial decisions about where to spend their money, ultimately leading to stronger, more fiscally resilient operations. However, it can also have serious adverse effects on the company when funding is insufficient. so Limiting it prevents opportunities to try, test new markets and take risks. The saying “it takes money to make money” makes sense, but when you’re in survival mode, finding capital can be confusing and even seem out of reach.
When I started my first business in 2005, I poured every dollar I had saved as an investment banker for four years, not realizing that there were other funding options available. Supporting growing business costs while managing personal expenses resulted in increased credit card debt and finally had to make the difficult decision to sell my home after the mortgage came due and I couldn’t pay it. That is a wake-up call!
I get it: there are fears associated with using outside funding to advance dreams. While debt or venture capital may not make sense for every business owner or at every stage of growth, let’s cut some conceptual red tape.
Here are some signs that you should seek funding.
1. You need to pay your bills before you generate income
According to our data, 69% of owners who have applied for financing in the past 12 months are seeking to cover operating expenses, while 52% are seeking funding of $25,000 or less. Many business models—such as construction, retail, and technology—require the purchase of products or investments in services in order to generate income. It makes sense to take on additional risk to drive growth when the other party has a revenue commitment (or even a good chance).
It’s hard enough to generate income and balance cash flow disruptions during boom times, not to mention when the news feeds a steady stream of headlines about bear markets, inflation, and re-emerging pandemics. This makes it even more important to double down on understanding financial fundamentals such as revenue run rates, gross and net profit margins, and net cash flow. How much will you need to survive in the next few months to a year? Put a real number on paper and seek lower-rate financing options to limit outstanding debt. Several options:
• Traditional bank loans: The approval process usually takes less than a month, but requires a good personal credit score (720 and above) (we found that only 50% of homeowners surveyed had a score higher than 680).
• SBA Loan: 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 score is putting you off, finding a guarantor or someone close to you to lend you money may be your best bet.
But remember, if you don’t have future revenue commitments, growth is slowing, and/or expenses are higher than cash inflows, it’s time to reset the fundamentals of your business model. Outside funding is sought to address temporary situations, not as a way to hide fundamental flaws.
related: Fund Management Fundamentals
2. You need to buy big
We found that 68% of owners who applied for financing last year wanted to expand their business, pursue new opportunities or acquire business assets. Whether you need to invest in the equipment, inventory, or tools needed to digitize and expand, prioritize the big-ticket items that will help achieve those goals and set a hard number before seeking financing. Also, understand the impact of bulk purchases on revenue. How long will it take you to get back the money you borrowed or invested? How will it help you expand your business? Finally, are there other options (like renting or borrowing) to explore before you fully invest?
For many owners, a credit card is a good option for this type of purchase. In fact, we found that 90% of business owners without business credit believe a business credit card will have a positive impact on their company. Many cards even offer zero interest rates for the first 3 to 12 months, like the popular Chase Ink Business Cash Credit Card or the new Hello Alice Small Business Mastercard, giving you more wiggle room for larger purchases (and boosting your credit score) ) without incurring expensive interest.
related: 10 Essential Startup Fees, and 10 to Avoid
3. You are ready to recruit
Of the owners planning to seek financing this year, we found that the vast majority (72%) plan to do so to hire new employees and will be seeking more than $25,000 to do so. For most small business owners, a traditional bank loan, line of credit, or SBA loan is the best option here, but again, make sure you’re in control of your finances and budget, including strong personal and business credit scores and up to Financial statements, including balance sheets, profit and loss statements, and bank statements.
While a cash advance might seem like a sexy option for getting your money fast (especially if you lack a strong credit score), the risks surrounding short-term factor rate financing—especially those that could climb into triple-digit APRs— May result in more harm than good.
Venture Capital Options
Seeking venture capital isn’t for everyone, but if you’re a high-growth company in need of massive funding, it might be time to create a pitch deck, refine your vision, and attract some investors.
According to a recent Harvard Business Review study, 30 percent of venture capital deals come from leads from former colleagues or work acquaintances. So, building those personal/professional relationships is critical when you put yourself out there — even more so for women and people of color, who have historically made up a tiny fraction of the recipients of VC money.
related: The only advice women need to raise money
Grants can also help, and in any game stage
While debt and venture capital come with inherent risks, I highly recommend applying for a grant regardless of your financing process. More public and private grants to small businesses than ever before to help refine vision, clarify financial statements and learn how to better identify and communicate your funding needs – especially for women, people of color, Veterans and the LGBTQ community.
Our data shows that 85% of homeowners want to apply for grants this year, but 47% don’t know where to go. The Hello Alice Small Business Grant Center and SBA.Gov are great places to access a variety of resources in the field.
Every entrepreneur who has big dreams and is willing to fight for them can get equal opportunities!