The Conference Board projects that the US economy will grow slightly faster in 2018. With this projected growth on top of the economy’s good performance in 2017, the business sector has finally vanquished the after-effects of the great 2008 recession. Based on these trends, U.S banks are again lending to small businesses
If you are looking to expand your business next year, now is a good time to think about how to finance that expansion.
The question you must answer first is “how much money do you need to grow?” The second question is “what is the best way to finance that growth?”
You have several basic options to fund growth. These options include debt financing, equity financing, profit financing or the new-kid-on-the-block, crowdfunding.
We provide a basic overview for each of these options below along with links to resources for additional information.
Fund Business Growth with Debt Financing
With debt financing, you take out a loan from creditors (banks or individuals). You must repay the debt principal and pay interest on the loan. This type of growth financing is appropriate if you need a smaller amount to finance your growth or you want to maintain full business control.
According to Value Penguin, small national or regional banks provided an average loan size of $155,000 to their small business borrowers in 2016.
Advantages and Disadvantages of Debt Financing
Advantages of debt financing include:
- You retain control of the company (no need to sell any share of your business)
- It’s temporary because when you repay the loan, you are done
- The interest you pay is tax deductible
Some disadvantages of this type of financing include:
- You will need to repay the loan out of your company’s revenue
- These types of loans can be hard to get
- You may need to personally guarantee the loan (placing your personal assets at risk)
- If you default, the lender can seize any collateral assets (you pledged for the loan) or force bankruptcy.
Types of Debt Financing
For most small businesses, local community banks and credit unions are often the best options for loans. In a prior blog post, we provide info on how to apply for bank loans.
SBA loans are a major source of capital for many small businesses that cannot obtain conventional bank loans. With an SBA loan, the bank lends the money and the SBA partially guarantees the loan. The most popular SBA loan types include 7(a) loans for basic business operations and the 508 for the purchase of major assets.
All business owners with more than 20% stake in the company must personally guarantee the SBA loans. You will need to have much patience to work through the SBA lending process unless you qualify for a low-doc loan. You can qualify for an SBA low-doc loan if you want to borrow less than $150,000. Visit this link for more information on SBA loans
Business Credit Cards
If your needs are small, you could consider opening up a credit card and using it solely for making purchases to support your growth. While this can be the easiest route to finance growth, you will typically pay a higher interest rate compared to other financing options. Make sure you shop around for the best rates. This link gives more info on how to use credit cards to finance business.
Friends and Family
You could approach friends and family for a business loan. If you go this route, make sure you document the transaction. You can visit a website such as bankrate.com to create a repayment schedule. You can also contact us if you need help with this.
Fund Business Growth with Equity Financing
With equity financing, you finance your growth by selling interest in your company. Many early-stage companies approach friends, family or angel investors to obtain early-stage capital. Make sure you have the correct legal and accounting representation if you plan to sell part of your company to others.
Advantages/ Disadvantages of Equity Financing
You can realize several advantages with this type of financing. You:
- Do not need to repay the funds
- Can get new partners to help grow your business
- Will not risk your personal assets
On the downside, with equity financing, you:
- Dilute your ownership of the company
- May find it hard to get investors
Should You Consider Crowdfunding to Fund Business Growth?
If your business is unique and/or you have a strong public presence, you can look to a crowdfunding campaign. With this type of funding, you finance business growth by raising small amounts of money from a large number of people, typically via the Internet. Popular platforms for this type of funding include kickstarter.com and gofundme.com.
Small business can select from three types of crowdfunding models to finance business growth, equity crowdfunding, reward crowdfunding and debt crowdfunding. You can read more about this type of financing at this link.
In our local area, a small business owner of two movie theaters in Fairfax needed new chairs for his theaters. He launched a kickstarter.com (reward funding) campaign in 2016 to raise $100,000.
Moviegoers received benefits for different levels of donations. Benefits ranged from a $10 donation (for one free movie pass and small popcorn as well as their name on the big screen) to a $1,000 donation (for an 8-second video/PowerPoint advertisement or message on the Big Screen before the theater’s movies play for 2 months.)
The owners promoted this “save our butts” campaign on Kickstarter and raised $116,000 in October 2016. You can review his campaign at this link.
FYI: On kickstarter.com, you state your goal and if you do not make the goal, you get no proceeds.
Financing Growth with Internal Profits
If your company is growing rapidly, you may be able to finance your business growth directly from those profits. When you use profits to finance growth, you have the best of all worlds. You do not incur debt or dilute your ownership.
Good luck with your business growth. If you need accounting help for your small business, please let us know.