Quick Tips For Getting Small Business Financing
I get questions from all over the country asking for tips and tricks to get financing for small businesses. To be honest I don’t know any shortcuts but there are a few things I would recommend to anyone building a business looking for money.
Bootstrap as long as possible
Try to bootstrap as long as possible before seeking funding. This allows you to build more value for yourself before selling equity or saddling yourself with a debt payment. It also creates operating history that banks like to see. The most valuable reason is that bootstrapping teaches you about your business. You have to be creative and really understand cashflow, customers, and all the little things that are important to success. Sometimes if you have money to soon you miss those little things which could be the difference between success and failure.
Understand the ROI of the funding
I would look at funding needs in comparison to the return on what you are going to do with the money. The ROI is critical. For example if you going to buy equipment, what will that do for your revenue/profitability/cashflow? If the return on the investment is significant and covers the cost of the money you had to borrow then you should consider it. There is a similar consideration with investors. If you bring in an Angel investor you need to be yielding results with the money that will more than offset the percentage of ownership that you are selling.
Get the right type of loan
It is important to understand what the various funding vehicles are before you ask for a loan. It is really about the life of the asset. Long-term assets (real estate) need long-term financing, short-term assets (equipment) need short-term financing and working capital needs a line of credit. A line will allow you to smooth out timing differences between putting out funds and getting paid.
If you are in need of marketing money early in your business’ life that needs to come from you own equity and/or from Friends and Family. The challenge when it comes to outside investors is that if you are predominately a service business it will be difficult to scale to a level that will generate sufficient return for investors.
Get the right investors
Trust me, you don’t know everything. When seeking investors look beyond the money. Investors can be a great asset to the growth of your business. A good investor should be on board with your vision. They should be good advisors and help you open doors. The biggest mistake you can make is focusing on only the money and bringing someone into your organization that does not make you better and possibly will hurt the company.
Don’t go it alone. Get some help
Bankers and investors have specific ways they do things. If you are not familia with how to play the game you are at a disadvantage. You may have a great business but if you present your request wrong you will probably not get anything. Trust me investors and bankers are looking for a reason to say “NO” and structural issues provide those reasons. What I recommend is that you find and visit your nearest SBDC. I used to work for an SBDC and I can assure you that there is a wealth of experience there that can help you. They provide business advising services, at no cost, to assist you build you business and if financing is appropriate they can certainly assist. Here is a link to the ASBDC to find a center close to you.
If you have questions on financing leave a comment here or drop me an email.