By Mason Cole
There will come a time when your business is ready to expand, but to do so you will need additional funding to ensure a healthy transition into the next stage of the business lifecycle. It is critical to ensure that your business is ready for funding prior to accepting any additional capital. Once you determine that you need funding, selecting the right financing option can greatly influence the long-term health of your company. So, when and how should a business seek funding?
When Should You Seek Funding?
Many entrepreneurs rush towards obtaining additional funding when their business may not be ready for the influx of resources. Before seeking funding, ask yourself if you need the extra capital. Determining if your business truly needs funding can save your company from a lot of headaches and potential profit loss. Prepare the necessary groundwork before seeking funding such as, a strong credit history, a bulletproof business plan (complete with growth projections and positive ROI), a reliable team of employees and a consistent stream of revenue. While those are not the only aspects of preparing for taking on additional funding, it is a good start to ensure the timing is right for healthy growth.
What type of funding?
While a variety of funding options exist for a business, not every option is going to be a perfect fit. Companies with major research and developments needs and no profitable revenue stream in place would benefit the most from venture capital. Whereas a business with consistent profits and slower projected growth will be a good fit for a traditional business loan.
Depending on a business’ credit history, stage and financing needs, a Small Business Administration-backed loan is a reliable option. These loans are easier to obtain, have longer repayment periods and lower interest rates. They come with such favorable borrower terms because the lender is guaranteed their money from the government, allowing them to take a risk they would not previously take. However, the time it takes to obtain an SBA-backed loan is longer, so this may not be an option to pursue if your company needs funding in a timely manner.
Another option a small business can use to increase their working capital is withdrawing a line of credit. While this financing option is good for daily cash-flow needs, they are not the right option for large purchases. A line of credit allows you to take on enough money for what you need, and you will only pay interest on the capital that you use. Whereas a traditional loan requires you to pay capital on the full amount regardless of its allocation. A new business may want to seek this option, as this route is a safe way to bolster a credit score. Lines of credit have long repayment terms with reasonable interest making it a viable option.
A newer financing option that has gained a lot of popularity in recent years is peer-to-peer lending, which effectively removes any official financial institutions from the equation. This method of debt financing connects borrowers with individual investors, and frequently offers lower interest rates than banks. Since peer-to-peer lending is not conducted through regulated financial institutions, exercise caution when pursuing this route of financing. While it can be a phenomenal option for a business regardless of credit standing, as with any financing option, heavily research where you are obtaining the money from to avoid any unintended consequences.
Creating a business plan to project market expansion and objectively analyzing your company will help determine which financing strategy is best to pursue. Other variables to consider before pursuing funding are the industry, lifecycle stage, size and business objective.
How to seek funding
With so many options for business owners to pursue funding, how do you know where to start? Networking with other, local entrepreneurs that have already traveled the road of obtaining funding is a great place to begin. They can offer valuable insight on the best practices and mistakes to avoid. Also, they may be able to connect you with their contacts that helped them along the way. Networking is an invaluable tool that has the potential to open many doors when it comes to building and running a business.
When seeking funding, start by creating a business plan that outlines the next five years. From there you can identify the pain points of your company to assess if you truly need funding. Should you find that you will need the extra capital, choose the correct financing strategy to ensure the best long-term health for your business. Working with an attorney who is well-versed in business law can be a welcome and invaluable resource to help select the best financing strategy.
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Mason Cole, founding partner of Cole Sadkin, LLC, focuses his practice on intellectual property. Whether you are looking to start a small entrepreneurial business or wanting to protect the next million-dollar idea, Mr. Cole specializes in guiding you from the initial incorporation or trademark to your exit strategy and every stage in between.