14. Funding, and preparing for the future today.
Today we will be talking about funding and preparing for the future today. Remember that saying, “you need money to make money”?
Well, it’s very true and we are gonna insure your business keeps growing with a well planned funding strategy.
Every business requires funding to grow, initially it could be your personal savings and your personal time, but eventually for business to grow, you will be required to hire people, purchase inventory or supplies, or run some ads and cash-flow will not be enough.
In this article we will not be talking about raising institutional money from VC and Angel Groups, “startups” is a very different type of venture from small business.
Instead we will focus on actually planning the future today with widely accessible funding channels to any business.
2. Family and friends
3. Credit Cards
4. Working Capital
5. Banks Business Credit and Loans
6. SBA loans
7. Awards (Cartier, Tory Burch, Girlboss)
8. Grants (minority and women owned business grants)
9. Microloans (Kiva, Accion USA)
Although this one is very obvious. Many people don’t realize they have enough savings, items that could be sold to get starting capital, or a skill that can earn cash by working a few hours or days a week.
2. Family and Friends
It’s called FF Round in the startup world. And is one of the indicators that founders are serious about what they are doing, since taking money from your family and friends is not the same as taking it from the bank.
It’s expected that you must return that investment regardless of the business outcome.
3. Credit Cards
This could be a great source of funding if you need to purchase something for business today if you expect to get a return on it within a month or two.
If there is a chance you will not get your money back to repay your credit cards, this will compromise your future ability to get funding from sources down this list and it may not be worth it.
I have definitely filled all of my credit cards to the limit many times over, and always repaid them within 3-6 months to acceptable limit, though not ideal, it still worked in the long term.
Almost any business funding requires business to be in operation for at least 2 years, taxes to prove it and some declared profit. However there are some exceptions.
This is where you need to establish good relationships or prepare for it years ahead of time. In the end it will save your business from potential death over and over again.
4. Working Capital
There are 2 types of working capital. Those that have prior relationship with your business and it’s based on sales and those that don’t. In my opinion you should avoid the latter and i will explain the reason behind it.
Paypal and Stripe Working Capital - you can be eligible to apply for a working capital if you process payments through either of these payment platforms for over a year (sometimes less).
The amount you can get is based on your prior sales only. Your credit is not a factor and will not be pulled (though some exceptions may apply).
This is one of the best business funding options you will get since it’s extremely easy to apply and get funded right away. You can play around the amount of loan and how fast you want to repay it.
Repayment happens gradually as a percentage of sales you already process through the payment platform.
For example: you have been processing $10k a month of payments through PayPal for a year. $120k in total. You may be eligible to get $20k of working capital. It will take 20% of your sales processed through paypal as a repayment of this loan and will take 1 year to repay.
PayPal will charge you an additional $3000 fee on top of the loan amount to repay. (these are not actual numbers and are very rough examples).
Once you repaid the initial loan, you can apply for the next one right away. Process is extremely easy and streamlined.
Other Working Capital sources, such as lendio, cabbage, etc.
Most of the time, they require to show profit, will provide you a small amount of funding for an outrageous interest rate and expect repayment within months, with some APR’s in 50-80% rate. On top of that you will get a hard inquiry on your credit report each time you apply.
Most of the time they send your application to other lending partners. Next thing you know, you start getting dozens of calls and emails from companies you have never heard of with outrageously high interest rate offers.
I would steer clear of those companies. While their websites and advertisements may sound very different, when you get real offers from their partners, it’s widely different than those ads.
5. Bank Business Credit and Loans
It’s important to build a business credit and a good relationship with the bank you have a business account with. I suggest using Chase or Bank of America.
It will make it easier to get your first business credit card with them after you had an account with them for over a year. However don’t rush to use it to it’s limit.
Treat it like your personal credit card. Repay it fully every month before the statement date and keep requesting to raise the limit every 12 months.
This will take a while, but in the end you can get to larger amounts and great business credit history that will allow you to build your business to scale.
IMPORTANT! It’s crucial you start building business credit from the day 1. Otherwise you might find yourself 10 years later with a multi million dollar company that has a business credit card with a $1000 credit limit.
Business Credit Line
Later down the line, you may apply to receive a credit line. Similar to a credit card (though not the same), with just a more significant amount.
It’s important to keep repaying it every 30 days, otherwise it may automatically convert to a term loan with not so great terms.
Business Term Loan
Loan Terms work very differently. They are based on many factors:
- Amount of monthly sales went through the account.
- Average monthly account balance
- Business Credit Score (discussed above)
- Personal Credit Score
- Loan use (you actually have to provide a business plan that shows how you intend to use it and how you plan to repay it)
6. SBA Loans
SBA loans a type of business loan, that is guaranteed by the federal government to be repaid by some % of the loaned amount.
For example, you apply for $100k SBA loan, and Small Business Administration guarantees 50% of the loan, in case you fail to pay, so banks are more relaxed on their requirements.
SBA loans are optional for businesses who’s business owners have a bad credit or not enough historical data to be approved.
Usually SBA loans take a long application and approval process. Complex paper work and vetting processes. Applicants must be legal residents or citizens in US with Social Security.
One of the many overlooked types of funding is awards. Many for-profit and non-profit organizations have annual awards. Usually your company needs to fit in a strict criteria to be able to apply. Some organizations that have awards are: Cartier, Tory Burch, Girlboss etc.
If your company is non-profit or has an important mission that aligns with specific grants, you may be able to apply for such.
For example, there may be diversity and inclusion grants for small business, in order to receive it, your business may be required to give job opportunities to minorities or people of color within 1-2 years.
You put an application with your business plans on doing that. After receiving it, you need to create yearly reports on the progress of the project. You may request time extension if you are falling behind on the project, but still show a clear path on how you are on the way to complete it. In some rare cases, grants may be revoked if business failed to deliver on it’s promise.
Similar to Awards, many companies would match a private contribution to a business that needs a loan for a cause. I don’t personally have much experience with microloans, however many businesses get this type of funding.
Examples of websites that offer them: Kiva and Accion USA.
Congratulations! Business funding is no longer a mystery for you, or so we hope.