Like a teenage boy, growing businesses have a huge appetite. They gobble cash, and you’re constantly amazed by how they manage to consume so much so fast. But when your company’s expanding, orders rolling in, and your ambition is high, you need money!
How — and where — can you find the money to help you manage the growth of your expanding company?
Credit cards: A majority of entrepreneurs (71 percent according to a Small Business Administration study of 1998 businesses) used credit cards to help finance their business. Why? They’re an easy and fast way to get and use money. But they’re dependent on your personal (not business) credit-worthiness, affect your personal credit score, may have high interest rates. Most importantly, it’s very easy to get in trouble.
Home equity: For many entrepreneurs, the value of their home (minus existing mortgages) has become a source of business financing, being far easier, faster, and usually cheaper to get credit based on your home’s value than on your business. But you put your home at risk, aggravate your spouse, and may not be able to sell your home without first paying off the loan. With the tightening of the mortgage market, it may be harder to secure these.
Banks and lending institutions: As the famous bank robber Willie Sutton said, banks are “where the money is.” Banks (and to an increasing extent, savings & loans and credit unions) are in the business of lending money to businesses. Banks do not invest in businesses.
Small Business Administration: The SBA has two major programs — 7(A) for general business purposes and 504, usually for purchasing buildings or major equipment. These are administered through banks or economic development corporations. Your bank will steer you to these if you’re a close call on qualifying for a normal bank loan. The SBA’s Loan Pre-qualification program is somewhat easier, but is based on the applicant’s personal creditworthiness. The SBA also has a small microloan program administered through nonprofits.
Angel investors: These are private individuals who invest their own money in businesses with high growth potential. They typically invest between $25,000 and $2 million. Angels are interested in keeping the entrepreneur in place to run the business and often offer excellent industry expertise and contacts. However, they expect high returns on their investments and the quality and involvement level depends on the personality and experience of the individual investor.
Venture capitalists: VCs invest other people’s money (usually institutional funds) in exceptionally high growth new enterprises. They expect massive returns on their investment, usually in short time frames. They may quickly bring in others to run the company, replacing the founders or changing their responsibilities. If the company does not seem to be growing fast enough, they may pull the plug on their involvement and their money. However, they have substantial resources — typically many millions of dollars — and can bring in professional managers to guide the growth of a company.
Vendors: Many suppliers offer financing in one form or another. It may be something as simple as being able to negotiate better payment terms (90 days instead of 30) or they may offer substantial loans on purchases such as major equipment. Be sure to ask about financing options as you shop around for new vendors.
Friends and Family: Sometimes called “friends, family and fools,” these are people who know you, believe in you, and want to help you succeed. They may offer loans or investments. The advantage is clear — this can be an easy way to raise money. But make sure that the financial relationship will not ruin the personal one, especially if the business does not succeed. Be careful, also, when a family member or friend makes you a “loan” that you don’t have to pay any interest on. In the eyes of the taxman, that’s a gift and may be taxable.
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