How to know if you need financing (and how to get it)

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Small business owners are more optimistic than ever about growth, but they also feel the crisis that comes with a lack of capital. This is only exacerbated in today’s inflationary environment, with rising costs affecting 92% of small business owners, according to

Here are some highlights from our latest research on access to capital:

• 51% of owners have sought some type of financing in the last year

• 41% report that their application (or at least part of it) was not approved

• 37% have grown their business more with personal savings than with any other type of financing

• 61% of owners use a personal credit card to finance businesses

• 89% say access to capital is limiting their growth potential

As a serial entrepreneur, I am a firm believer that limited capital forces leaders to make difficult but vital decisions about where to spend, ultimately resulting in a stronger and more fiscally resilient operation. But it can also seriously harm a company when capital is so that blocks opportunities to experiment, try new markets and take risks. There’s some truth to the saying, “It takes money to make money,” but looking for capital can be confusing or even seem out of reach when you’re in survival mode.

When I started my first business in 2005, I invested every dollar I had saved over four years as an investment banker, not realizing there were other financing options available. Supporting rising business costs while managing personal expenses resulted in mounting credit card debt and ultimately the difficult decision to sell my house after the mortgage was due and I had no way to pay it. That it was a wake up call!

I get it: there is fear associated with taking outside funding to fuel a dream. While debt or venture capital may not make sense for every business owner or at every stage of growth, let’s cut through some conceptual red tape.

Here are some signs that you should seek financing.

1. You must pay the bills before generating income

According to our data, 69% of homeowners who applied for financing in the last 12 months were looking to cover operating expenses and 52% were looking for $25,000 or less. Many business models, such as construction, retail, and technology, require the purchase of products or investment in services before income can be generated. When there is a commitment (or even a high probability) of revenue from the other side, it simply makes sense to take on additional risk to drive growth.

Generating income and balancing cash flow disruptions is difficult enough in boom times, let alone when the news is broadcast non-stop with headlines about bear markets, inflation, and a resurgent pandemic. This makes it even more important to double down on understanding financial fundamentals such as revenue run rate, gross and net profit margins, and net cash flow. How much do you need to survive for the next few months to a year? Get a true figure on paper and look for financing options with lower interest rates to limit outstanding debt. Some options:

• Traditional bank loans: The approval process typically takes less than a month, but a strong personal credit score (720 or higher) is required (we found that only 50% of homeowners surveyed had a score above 680).

• SBA Loans: A better option for homeowners with less than a year of history and income, but may take more than 90 days to be approved.

• Friends and family: If your credit score is holding you back, finding a cosigner or close contact to lend you money may be the best option.

Remember, however, that if you don’t have a future revenue commitment, growth has slowed, and/or expenses are higher than cash inflows, it’s time to reset the fundamentals of the business model. Seeking outside capital is meant to address a temporary situation, not as a way to hide basic flaws.

Related: The basics of money management

2. You need to make a big purchase

We found that 68% of homeowners who applied for financing in the past year wanted to expand a business, pursue new opportunities, or acquire business assets. Whether you need to invest in equipment, inventory, or tools needed to, say, digitize and expand, prioritize the high-value items that will help you achieve those goals and determine a concrete number before seeking financing. Also, understand what the revenue impact of a large purchase will be. How long will it take you to recover the funds you have borrowed or invested? How will it help scale your business? Lastly, are there alternatives (such as renting or borrowing) to explore before fully investing?

For many owners, credit cards are a good option for these types of purchases. In fact, we found that 90% of owners without business credit believe a business credit card would positively impact their business. Many cards even come with interest-free offers for the first three to 12 months, like the popular Chase Ink Business Cash credit card or the new Hello Alice small business Mastercard, allowing more wiggle room to pay for a big purchase ( and improve your credit). score) without accruing costly interest.

Related: 10 essential start-up expenses and 10 to avoid

3. You are ready to hire

Of the owners who plan to seek financing this year, we found that a vast majority (72%) plan to do so to hire new employees, and will seek more than $25,000 to make that happen. A conventional bank loan, line of credit, or SBA loan are the best options here for most small business owners, but again, be sure to monitor your financial health and budget, including strong personal and business credit scores. and updated. up-to-date financial statements, including a balance sheet, income statement, and bank statements.

While cash advances may seem like an attractive option for getting money quickly (especially if you don’t have a strong credit score), the risks surrounding short-term factor-rate financing, and in particular APRs that can reach three digits, could result in more harm than good.

The venture capital option

Seeking venture capital isn’t for everyone, but if you’re a high-growth company in need of large-scale financing, it may be time to build a pitching platform, hone your vision, and get in front of some investors.

According to recent research from the Harvard Business Review, 30% of venture capital deals come from leads provided by former colleagues or work acquaintances. Therefore, building these personal/professional relationships as you go is critical, even more so for women and people of color, who historically represent only a tiny fraction of venture capital funding recipients.

Related: The only advice women need to raise capital

Grants can also help, and in none game stage

While debt and venture capital come with inherent risks, no matter what your funding journey looks like, I highly recommend applying for a grant. More than ever before, public and private grants are available to small businesses to help hone a vision, clarify financial statements, and learn how to better identify and communicate their funding needs, especially for women, people of color, veterans, and the LGBTQ community.
Our data indicates that 85% of homeowners want to apply for a grant this year, but 47% don’t know where to go to apply. The Hello Alice Small Business Financing Center and SBA.Gov are great places to access various resources in this area.

Here’s to equal access for every entrepreneur with a big dream and the will to work for it!

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