Cash Flow challenges can put the stop to any business very quickly. What do you do when your cash is running low? What if you billed everything you can and delayed vendor payments as long as possible? What do you do if you have already considered leasing and maxed out the bank line of credit? What is next?
This week we will take a look at using options such as personal or conventional business loans, SBA (Small Business Administration) loans, and private equity.
If you haven’t read the first three parts to this series, please see the links below.
Level 1 funding opportunities are low risk and highly recommended for any business. Level 2 opportunities are more expensive and a bit riskier but could be necessary in high growth situations. Finally, level 3 should be considered only after looking at options in levels 1 and 2.
Personal / Business Loans
In talking with a banker friend at a large global bank, a conventional business loan should be considered before a Bank Line of Credit in some cases. Consider a traditional five-year loan if you have been in business for at least 2 years and are needing cash for hiring, expanding the office or warehouse, purchasing equipment, increasing inventory, or buying land. Leave the Line of Credit to help with seasonality, slow customer payments, or any other short-term cash challenge.
What if you have been in business less than 2 years? Aside from an SBA loan, what can you do? One option is to get a 12 month 0% credit card. You definitely don’t want to keep a balance after 12 months. I would only consider this if it is a bridge to get your business to two years old. Many banks want to see 2 years of financials and tax returns.
Another option is to do a home equity loan to help with cash flow mainly because it is a low interest rate and does not require any business history. This is purely using personal assets to help finance the business. In a period of increasing home values, this can be an important option to consider.
There are pros and cons to everything. An SBA loan is certainly no different.
- The government guarantee is at least half the loan amount.
- Payments are lower because maturity terms can be 7-10 years for working capital and 25 years for fixed assets.
- It may be the only option if the business cannot get a traditional loan. There are multiple SBA programs that could be of benefit depending on the business situation.
- The fees are higher. For example, if a business is borrowing over $150,000, there is a fee of 3% of the amount the SBA is guaranteeing.
- It is time consuming due to increased paperwork. What did you expect? It is the government.
- You will need collateral such as your home and most likely outside income (ex. spouse’s salary) to qualify.
Private Equity is any kind of outside investor in which a percentage of the business (equity) is given to an investor for capital.
- Angel Investors
An angel investor must meet the definition of an accredited investor, which is net worth of at least $1 million and make $200,000 a year ($300,000 a year with a spouse). Funding from an angel investor are typically large amounts over $500,000. There are angel investor groups that meet regularly to invest.
The challenges with working with an angel investor is that you have to give up possibly up to 50% of the equity. They are looking to make a good return on their investment and eventually sell or take the company public. An owner could find themselves out of a job eventually.
- Crowd Funding
Crowd Funding is raising money for a project, business, or fundraiser through small amounts of money from a large number of people usually through an internet site.
In October 2015, the SEC adopted rules to permit crowdfunding such as below.
- A company can raise up to $1 million.
- Investors with income or net worth less than $100,000 can only contribute the greater of $2,000 or 5% of annual income or net worth.
- Investors with more than $100,000 in net worth or income can contribute the lesser of 10% of their net worth or income.
If you are looking to start a company, check out 22 Crowdfunding Sites (And How to Choose Yours). It breaks down the best crowdfunding sites based on industry, purpose, region, entity, and so much more.
If you have a good idea or business plan, there are many options to help with funding. Conventional loans, rather business or personal, are always an option. Consider an SBA loan if a conventional business loan will not work but keep the pros and cons in mind. Finally, private equity is always an option through the use of an angel investor for large amounts of capital or Crowd Funding for lower amounts.
Next week, we will wrap up this series by looking mostly at Level 3 options and riskier ways to fund your business.