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Small business owners are more optimistic than ever about growth, but they’re also feeling the crunch that comes with a lack of capital. This is only exacerbated in today’s inflationary environment, with rising costs impacting 92% of small business owners, according to business.org.
Here are a few highlights from our latest capital access research:
• 51% of owners have gone after some sort of financing in the last year
• 41% report that their application (or at least some of it) wasn’t approved
• 37% have grown their business more with personal savings than any other type of funding
• 61% of owners use a personal credit card to fund companies
• 89% claim that access to capital is limiting their growth potential
As a serial bootstrapping entrepreneur myself, I’m a strong believer that limited capital forces leaders to make hard but vital decisions about where to spend, ultimately resulting in a stronger and more fiscally resilient operation. But it can also severely disadvantage a company when capital is so limited that it blocks opportunities to experiment, test new markets and take risks. There is truth in the saying, “It takes money to make money,” but looking for capital can be confusing or even seem out of reach when you’re in survival mode.
When I started my first business back in 2005, I poured in every dollar I’d saved over four years as an investment banker, 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 the hard decision to sell my house after the mortgage came due and I had no way to pay it. That was a wake-up call!
I get it: There is fear associated with taking outside funding to fuel a dream. While debt or venture capital may not make sense for every business owner or at every stage of growth, let’s cut through some conceptual red tape.
Here are some signs that you should seek funding.
1. You Need to Pay Bills Before Generating Revenue
According to our data, 69% of owners who applied for financing in the past 12 months were seeking to meet operating expenses, and 52% were looking for $25,000 or less. Lots of business models — like construction, retail, and technology — require purchasing products or investing in services before revenue can be generated. When there is a commitment (or even high likelihood) of revenue on the other side, taking on additional risk to fuel growth just makes sense.
Generating revenue and balancing disruptions to cash flow is hard enough in boom times, let alone when newsfeeds roll non-stop with headlines about bear markets, inflation and a resurgent pandemic. This makes it all the more important to double down on understanding financial fundamentals like revenue run rate, gross and net profit margins and net cash flow. What amount do you need to survive over the next few months to a year? Get a real figure down on paper, and seek financing options with lower interest rates to limit outstanding debt. A few options:
• Traditional bank loans: The approval process typically takes less than a month, but a strong personal credit score (720 and above) is required (we found only 50% of owners surveyed had a score above 680).
• SBA loans: A better option for owners with less than a year’s worth of history and revenue, but it could take 90-plus days to be approved.
• Friends and family: If your credit score is holding you back, finding a cosigner or close contact to loan you money may be the best option.
Remember, though, if you have no future commitment of revenue, growth has slowed and/or expenses are higher than cash inflows, it’s time to reset the fundamentals of the business model. Seeking outside capital is meant to address a temporary situation, not as a way of hiding basic flaws.
Related: The Basics of Money Management
2. You Need to Make a Big Purchase
We found that 68% of owners who applied for financing in the last year wanted to expand a business, pursue new opportunities or acquire business assets. Whether you need to invest in equipment, inventory or tools needed to, say, digitize and expand, prioritize the big-ticket items that will help achieve those goals and determine a hard figure before you seek financing. Also, understand what the revenue impact of a large purchase will be. How long will it take you to recoup the funds you’ve borrowed or invested? How will it help scale your business? Lastly, are there alternatives (like renting or borrowing) to explore before you fully invest?
For many owners, credit cards are a good option for these types of purchases. In fact, we found that 90% of owners without business credit believe a business credit card would impact their company in a positive way. Numerous cards even come with zero-interest offers for the first three to 12 months, like the popular Chase Ink Business Cash Credit Card or the new Hello Alice Small Business Mastercard, allowing more wiggle room to pay off a big purchase (and improve your credit score) without accruing costly interest.
Related: 10 Essential Startup Expenses, and 10 You Should Avoid
3. You’re Ready to Hire
Of the owners planning to seek financing this year, we found that an overwhelming majority (72%) plan to do so in order to hire new employees, and will seek more than $25,000 to make that happen. A conventional bank loan, line of credit or SBA loan are the best options here for most small business owners, but again, make sure you have a handle on your financial health and budget, including strong personal and business credit scores and up-to-date financial statements, including a balance sheet, income statement and bank statements.
Though cash advances may seem like a sexy option for getting your hands on money fast (especially if you lack a strong credit score), the risks surrounding short-term factor-rate financing — not least APRs that can climb into the triple digits — could result in more harm than good.
The Venture Capital Option
Seeking out venture capital isn’t for everyone, but if you’re a high-growth company in need of large-scale funding, it may be time to create a pitch deck, polish your vision and get in front of some investors.
According to recent Harvard Business Review research, 30% percent of VC deals come from leads provided by former colleagues or work acquaintances. So, it’s critical to build these personal/professional relationships as you put yourself out there — even more so for women and people of color, who historically make up only a tiny fraction of VC funding recipients.
Related: The Only Advice Women Need to Raise Capital
Grants Can Also Help, and at Any Stage of the Game
While debt and venture capital bring inherent risks, no matter what your funding journey looks like, I highly recommend applying for a grant. More than ever before, public and private grants are available to small businesses to help hone a 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 indicates that 85% of owners want to apply for a grant this year, but 47% don’t know where to go to apply for one. The Hello Alice Small Business Funding Center and SBA.Gov are great places to access diverse resources in this sphere.
Here’s to equitable access for every entrepreneur with a big dream and the will to work for it!