Ways to Finance your Small Business

How do you finance your small business? It’s a good question.

Unless you are independently wealthy, you are going to need money. An early mentor told me that I would need twice as much money and time to grown my business than I thought. I vividly recall thinking, “Not me!”, but she was right. In fact, I would say that it has taken four times as much money and time as I had thought. So learn from my mistake and plan for it.

A recent feature in Crain’s Chicago Business discusses the current state of small business financing, and it’s worth a read. Here’s my take on the different sources for cash.

1) Your own money. Plan to use pretty much all your savings over time (guess who covers the cash flow crunches???), but try not to touch your retirement account, as that would be irresponsible.

2) Friends & Family. Nobody really wants to do this, but you’ll probably have to, as you’ll run out of your own money at some point. I only asked people for money who met three criteria: 1) Had money that they didn’t really need to survive; 2) Knew me and trusted me; 3) Liked the idea of supporting an entrepreneurial venture. A handful of former colleagues and close family members met this criteria, and they all gave. I asked for a loan rather than an investment; it seemed simpler and better fit the spirit of the request, as people wanted to help me more than get rich off my company.

3) Microloans. Non-profits like ACCION lend to small businesses that would be refused by traditional banks for various reasons. The loan amounts tend to be smaller (under $50,000) and interest rates are higher, but they are accustomed to working with non-bankable businesses, and therefore are much more understanding and creative in their approach. I have had two loans with ACCION and found the process to be painless and almost enjoyable, as I really feel like they are rooting for me.

4) SBA Loans. Banks don’t want to lend to small business: too risky. The government’s Small Business Administration (SBA) will guarantee a bank’s loan to minimize its risk. These are almost easier to get as a start-up than as a young business, because if you’re the latter, you’ll need to show positive cash flow (i.e. profit), have collateral and have good business credit, most of which you probably won’t have. I’ve been turned down by seven banks, despite having year-over-year growth, so I haven’t really found this to be a doable option. Plus, each application takes hours and hours of paperwork so it can feel like a major waste of time if it doesn’t work out. Not to mention that the bankers will treat you like a big loser, which sucks.

5) Crowdfunding. Kickstarter, Indiegogo, and the like, is probably where new product companies go for the first round of capital nowadays. It make sense, because you can pay for your first production run AND get your first customers. Some people keep going back to the crowdfunding well for more money, but it seems like you’d eventually hit a point of diminishing returns. Po Campo did a Kickstarter campaign for our Bike Share Bag in May of 2013. It was successful, but was so much work that I can’t imagine it would pay off as a longterm strategy.

6) Alternative sources. These run the gamut and some can be kind of loan shark-y, so be careful. A common method of funding is to pay back a loan with a portion of sales, plus interest. You typically can get the money quickly, but if you can’t pay it back quickly, then it can turn out to be incredibly expensive. I think it’s best for companies that sell a lot daily, like a restaurant. Online sales take a long time to build up so this isn’t a good option if you’re just getting going. Paypal Working Capital offers this for existing customers, which I haven’t tried yet but might in the future. Bolstr is a Chicago company with a similar approach, using investors’ money without giving up equity. We did a program with them last year. I thought it was a lot of paperwork for just $10K, but could be an option for you.

7) Angel Investors. Typically this is the next step in major funding (think $100K+) after the friends and family stage. A characteristic of angels is that will buy into your vision and will offer guidance and mentorship to get to the next level. This isn’t a philanthropic donation however. They will take a share of your company and will expect to see a return on their investment, usually when you sell your company down the road, or during a future fundraising round. Po Campo has no investors, but I’m looking. You can’t just look angels up in the phone book, so it’s lots of networking to find someone that’s a good match.

8) Venture Capitalists. VCs focus on high growth companies, which pretty much isn’t you if you are making a tangible consumer product. There are exceptions of course, but high growth companies are in the tech field, as this interview with venture capitalist George Deeb succinctly explains. VCs get all the attention in the media, but this is probably your least likely source of capital.

As you can tell, I’ve tried most things. None of it is very pleasant but seems to be just a fact of life of a small business. I’d love to hear your take on the different methods in the comments.

2 thoughts on “Ways to Finance your Small Business

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