How to Finance Your Small Business's Future
Identify what your small business is doing right, then capitalize on it.
While some people romanticize about being the self-made entrepreneur, rarely does an individual with nothing but a dream and $5 in the bank bootstrap an idea into a business empire. Remember the old adage “it takes money to make money?” More often, those self-made entrepreneurs need periodic infusions of cash to reach new heights.
”Financing is a bet on future income,” says Mike Michalowicz, business expert and author of the book Profit First. “So if you receive financing, you have to have confidence that you’re going to be able to repay that in the future.”
Whether the goal is growth or survival, there comes a point in nearly every entrepreneur’s life when he or she must consider whether or not to seek outside financing. That’s the point when you’ve figured out that what you’re doing is right, says Michalowicz. When you know what’s working, “that’s when you finance it because now it’s a cash machine.”
Financing Your Small Business’s Future
If you do decide that financing is in your future, here are three options for infusing your business with cash.
Apply for a small business bank loan. “I’m a big fan of banks, specifically credit unions,” Michalowicz says. One reason is because they are easily accessible. “You can just walk down the street and there’s a source of money.” However, getting approved may not be so easy, particularly if your business doesn’t have a strong track record or a good credit rating. If your business is considered particularly risky, you may get a loan but with higher interest rates. One way to help alleviate a bank’s concerns is to consider a Small Business Administration (SBA) loan. “If you seek a loan and the banks see you as higher-risk, the SBA will step in and say, ‘we’re going to take on that risk,’” says Michalowicz. That makes it easier for you to get approved.
Reach out to venture capitalists. Another source of funding small business owners may consider is the venture capitalist (VC) or angel investor. These are typically wealthy individuals who were likely former entrepreneurs themselves. Not only do they invest in businesses, but they often introduce business owners to new connections, which can sometimes be even more valuable than money. The downside is they’re harder to find than banks and they become a partner in your business. “When you get a loan from a bank, the bank isn’t going to come to your next meeting and say, ‘OK, here’s what you should be doing in your business,’” Michalowicz says. “An angel investor absolutely may be doing that.”
Access fast cash via credit cards — but be careful. The funding source that makes Michalowicz the most nervous is credit cards. “The upside is that it’s instant money,” he says. The downside is that you personally guarantee the loan, meaning you’re personally responsible for paying it back. “Secondly, credit cards typically have extremely high interest rates,” he says, which can ultimately hamstring your business just when you need money the most.
Financing is a gamble on future income, so you need to make sure you’re making good bets. That means investing the time to distinguish between what’s working in your business and what’s not. Michalowicz says, “The time to head to the bank or VC is when you have the confidence that you’ll be able to pay that money back very quickly and make more money, which is the objective.”
While your small business grows, make sure you're protecting everything you’ve worked for. An American Family Insurance agent can help you craft a policy tailored to your small business’s needs.