Mark Hauser, co-managing partner of Hauser Private Equity, highlights various small business funding methods, and what types of impact these methods may procure.
Launching a small business is a substantial undertaking requiring a healthy amount of determination and perseverance. Stated another way, an entrepreneur should understand that their business won’t be a “get rich quick” proposition.
The process typically begins with the business owner’s expertise in their industry. They also bring plenty of resourcefulness and sweat equity to the table, often devoting long hours to the varied tasks needed to keep the young company going. Although team members may often assist in certain areas, the entrepreneur is responsible for keeping all the balls in the air.
However, the business will never get off the ground without a vital commodity: money. Business owners typically need cash for infrastructure, equipment, production, information technology, and payroll, among other expenses. Even a business established on a shoestring needs a certain level of cash inflow to keep it going.
Private equity executive Mark Hauser discusses seven potential sources of business operating funds. Today, traditional funding vehicles are joined by several digitally driven options.
Traditional Business Loan
Banks and credit unions remain popular small business funding sources. Borrowers with good credit, and with an established business history, will likely benefit from more affordable interest rates and loan terms. In addition, a good payoff record will help to build good business credit for larger loans.
However, new businesses (and those with no proven business credit) will find it difficult to qualify for traditional bank loans. If the business owner has a substandard personal credit score, that can also negatively impact their business loan application approval. And if the business does obtain loan approval, the actual funding process can be painfully slow.
Small Business Administration Loan
The U.S. Small Business Administration (or SBA) is behind a relatively affordable business financing option. Although the SBA doesn’t grant loans under its own banner, SBA-approved lenders do issue these loans to approved borrowers. Mark Hauser emphasizes that the federal government guarantees part of each loan, easing lenders’ worries about recouping their investments.
Businesses that qualify could receive up to $5 million in loan proceeds with a competitive interest rate. Some companies are approved with a down payment of 10 percent of the loaned amount. Finally, some SBA loans offer repayment terms of up to 30 years.
However, SBA loans generally have very strict approval criteria. In certain cases, each business owner with at least a 20 percent stake may have to personally guarantee the loan. Assuming the loan is approved, the funding process may take some time.
Online Business Loan
Decades ago, a business owner visited their local bank to apply for a business loan. In the 21st century, Internet-based non-bank lenders offer a diverse menu of business loans. Mark Hauser notes that financing options can cover expenses such as working capital, inventory and equipment purchases, or debt consolidation, among others.
Loan terms, interest rates and fees, and repayment terms vary with the lender and the loan type. As a bonus, these online loans generally offer more flexible approval criteria compared to standard bank loans. This means an approved business sees the funds in its bank account more quickly.
However, online business loans have their downsides. Interest rates are often higher than those for a traditional bank loan. In addition, fees may outstrip those for other business financing methods.
Business Credit Card
Companies that need on-demand financing should consider a business credit card. Credit approvals may be easier to get than business loan approvals, and paying off the balance every month avoids interest payments. A business credit card is also useful for building a business credit history.
However, business credit cards do have their negatives. Consumer credit card interest rates are trending higher, and business credit card rates are often higher still. A personal guarantee may also be required for approval.
The business credit card may be included on the owner’s personal credit report, potentially harming their credit score. Finally, Mark Hauser points out that business credit cards lack the same federal protections extended to consumer credit cards.
Business Line of Credit
A business line of credit as a funding method enables a company to borrow money as the need arises. If the business isn’t sure exactly how much it requires or wants a ready capital source, a business line of credit may be ideal.
Available via traditional banks and online lenders, this funding option can also help to build a business’s credit history. Private equity expert Mark Hauser explains that each lender has its own approval criteria and interest rate structure.
Similar to a credit card, the business can borrow up to the account’s credit limit, only paying interest on the funds actually used. When the funds are repaid, the business can again borrow up to its preset credit line. However, when the credit term expires, the business’ funding access ends.
A business line of credit also has other disadvantages. A company may receive a lower credit limit than would be available via other funding sources. Interest rates are typically higher than traditional banks’ rates, and high fees can also add up over time.
Small Business Grant
By any definition, a small business grant is essentially “free money.” The business owner doesn’t have to sacrifice business equity to obtain the funds, and they don’t have to repay them.
However, the business owner may have to perform extensive research to find applicable grants as a funding method. Regardless of the industry, the business can expect stiff competition for the funds.
Finally, the application process is time-consuming and requires extensive documentation ─ especially for multiple grant applications. Some business owners hire professional grant writers who know how to navigate the grant-writing process.
Recent decades have seen the rise of crowdfunding, a 21st-century way to generate cash via online methods. Crowdfunding options include repayable debt crowdfunding along with equity crowdfunding which relies on investor commitments. Donation-based crowdfunding, and rewards crowdfunding which provides donor benefits, are other popular crowdfunding methods.
Each crowdfunding type has certain dedicated platforms, so business owners must learn to navigate them. Once onboard, entrepreneurs may get relatively low-risk funding and can use the opportunity to build brand awareness. In some cases, the business owner uses a crowdfunding round to “test the waters” before actively launching their business into the marketplace.
However, the funding method of crowdfunding does have some notable cons. With stiff competition, business owners may find it difficult to attract investors or donors. In addition, business owners must pay certain transaction fees, even for a donation-based crowdfunding round. Finally, crowdfunding is not guaranteed to produce the desired results.
5 Ways Companies Can Increase the Chances of a “Yes”
Regardless of the funding vehicle, a lender or investor wants proof that the business owner is serious about their venture. Here are five tactics that will help to emphasize the point.
Design a Professional-Looking Business Plan
Mark Hauser emphasizes that a professionally crafted business plan can show that the business has a product or service that the market wants. Ideally, the business owner will show that customers want to purchase that offering at a price that allows the company to generate a profit.
Create a Cohesive Business Brand
A business’ brand should be reflected in every element of its operations and marketing. Working with a branding expert will help ensure that the business clearly communicates its value to customers and the marketplace.
Craft a Clear, Concise Pitch Deck
When meeting with funders and/or investors as a funding method, a business owner should arrive equipped with a professional-looking pitch deck. Lasting less than 20 minutes, this impactful summary should clearly explain the business concept. The presentation should also state why the funds are necessary and how they will be used to help the business grow (including timelines).
Maintain a Growing Professional Network
During Mark Hauser’s successful career, his ever-expanding professional network has helped him cultivate clients and collaborate with business colleagues. For an emerging business, a growing professional network sets the stage for introductions to those who may be key to the business funding process.
Staying in touch with past coworkers and other colleagues is an important first step. In addition, becoming a fixture at regional networking events could result in introductions to loan managers or investors.
As with any business exchange, learning about other professionals’ goals and needs helps to make the interactions a two-way street. When business owners actively contribute to others’ successes, they are well-positioned to meet their own targeted goals.
Consider Working with Venture Capitalists
Some startup business owners may be crunched for cash but they don’t want to apply for a loan as a funding method. Instead, they look for venture capitalists (or VCs) who will invest money into the business in exchange for an ownership stake.
Some VCs only work with businesses in specific industries while others are open to partnering with anyone. Performing targeted searches, and looking for local VCs first, are both good tactics.
Business Funding Can Be an Ongoing Process
An expanding business may need capital, equipment, and other resources. By accurately determining the company’s needs, and using the proper funding vehicles, the business can grow and meet its objectives. You must determine your short-term and long-term goals and carefully plan your business funding according to them.
Ideally, you should look over the potential scenario and figure out whether any financial obstacles will get in the way during your business growth. You must also establish what you can do to overcome them. Plan strategies in order to successfully fund your business and help it grow.
So, are you ready to get funding for your business? You have different funding methods available, so make sure to choose one based on your possibilities and goals. If you can prove that you have a serious strategy, the lender will be more willing to offer you the money. Ensure that your business plan is clear, detailed, and realistic before you apply for funding.