(or A Banker Tells You How to Get Money)
If you want to learn how to fix shoes, you go to a cobbler. If you want to learn how to make a cobbler, you go to a baker. And if you want to learn how to find the money to buy a building that you can rent to a baker, you come to me. Or another banker. Because that’s one of the things bankers specialize in – knowing how to fund businesses. And here you are.
There are many ways to fund your business, whether you need startup funding to get your business going, or funding to keep your business growing (remember our previous blog on adding another location). And before you think this post is just shameless self-promotion, I will be the first to admit that there are other ways besides bank loans to fund your business. In fact, I am going to go through them for your consideration, so you might find one that best fits your needs or style of business. (And yes, it’s my blog, so we’ll start with the bank loan.)
- Bank Loans – These are definitely one of the most common forms of funding for growth. Many growing companies will need a line of credit or other loans to fund growth because most of their cash is going towards operations and other fixed costs. That is certainly one of the main benefits of bank financing is that growth would be very difficult without the ability to borrow money. Another appeal to this type of funding is that this money is often cheaper than equity financing. A bank charges you interest, while investors take a piece of your company. When it comes to startup financing, bank loans can be a bit more challenging, but there are creative options to start a business using bank financing.
- Personal Savings – This is probably the most common way of funding a startup business. You’ve heard the success stories that start with “He used his last $2,500 of savings to launch his modern mulch art business… and the rest is history.” Well this method works because usually businesses will start with really low overhead, and therefore they require relatively little capital to launch.
- Credit Cards – I consider this a hybrid method of personal savings and bank loans. I have seen many business owners come to a bank a couple of years after starting up with a request to pay off credit cards that are in their personal name, but that they used for the business. This is a fairly common method.
- Friends and Family – Where would we be without them? Loans from friends and family can be a great resource and are a very common way of funding new businesses. But the most important consideration here, in my view, is the relationships with your friends and family and how borrowing/accepting money will affect those relationships in the future. No business is worth sacrificing family or friends.
- Equity Investors – These would be financing options that would include mezzanine financing, outside investors, venture capital, angel investors, or private equity investors. A lot less common for most small businesses but could be a possibility for more sizable or rapidly growing small businesses and start-ups.
- Factor Financing – This is financing that’s geared more towards growing businesses that have cash flow issues. A factor finance company will purchase your receivables at a discount in order for you to get cash now.
- Business Colleagues/Acquaintances – This can be a great source of funding because these are people who know you, know your capabilities, and have seen you demonstrate your passion for your business. Investments by, or partnership offers from this group of people can not only provide financial opportunities but can also open business doors you may not have considered before.
One last thing on funding your business. I want to share with you one of my favorite charts regarding business funding. It measures some of the fastest growing companies across America and offers some interesting insights on where these very successful companies are getting their funding. If you have a minute, I think you’ll find it very enlightening.
We’ve all heard the expression “It takes money to make money.” And it’s true. The key is being able to get some money in the first place. I hope this list of potential funding sources for your business helps.
In the meantime, if you have any questions on funding your business, feel free to reach out any time, and we can have a great discussion. And bring some cobbler. I’m hungry now for some reason.