If you want to go fast, go alone. If you want to go far, go together.
This old saying is relevant when it comes to small businesses. Most businesses eventually reach a point when they need to seek small business financing from outside sources.
Some business owners turn to outside funding because the books are thriving. But in the COVID-era, many others are looking at surviving and using the extra financial support as a bridge across difficult times.
Despite being the beating heart of many economies, SMEs often find it difficult to secure funding. In fact, it can be hard to know what your options are in the first place.
This guide aims to help you with this. You’ll discover:
- Should you seek outside funds for your small business?
- How to use small business funding
- 9 small business funding sources
- How to choose a funding partner
Let’s jump in.
The small business guide to raising capital
Learn how you can secure funding for your small business and start using it to grow sales and streamline operations.
Should you seek outside funds for your small business?
You might want to get some help with cashflow. Or maybe you’re planning to buy some new specialist equipment. Or, you could be exploring how to bring more of your retail store sale activities online. Business owners have an almost endless array of reasons for seeking outside funding.
“When the pandemic hit, our $2.8 million per year business crashed to zero overnight,” said Michael Alexis, CEO of TeamBuilding, which runs team-building events for companies such as Johnson & Johnson, Netflix and Apple. “For us, seeking outside funds was a lifeline to keep the business going while we reinvented with a new model.”
Funding was clearly transformative for TeamBuilding—but every business is different. And it’s important to take a look at the downsides of outside funds, as well as the upsides.
Pros and cons of small business financing
The main benefit to pursuing outside funding is that it allows you to continue achieving your business goals—without having to cut back on expenses.
When businesses cut costs, it can hamper important goals, said Nishank Khanna, CFO of Clarify Capital. “Paying for the right talent, or the best equipment, for example, is often worth the upfront money because it makes your business better,” he said.
That said, a major drawback of raising certain funding is that it can dilute interests and add more external pressures. “For example, if you sell equity in your business to raise funds, then you will have a smaller stake in it,” said Alexis. “As the business grows, you don’t participate in as much of the upside. If you take a loan, then you add interest charges and a risk of default.”
When to seek outside funds (and when to hold off)
But let’s say you’ve decided you’re going to go ahead.
When should you seek funding for your small business?
Here’s what two business owners had to say.
- Seek funds before you need them, suggests John Miller, who is COO of Addition, a London-based financial services firm for SMEs. “Write a financial plan and then work out when you need to raise. Don’t rush to the first deal you see, as there are plenty of options out there.”
- Seek funds when you have a business plan. Your plans should include how you will repay your loans and grow your business,” said Jeffrey Zhou, CEO of Fig Loans. “You may feel a business plan is too formal if you’re asking for funds from friends and family—but keeping things professional is always advised. This way, everyone who is willing to chip in has a more informed perspective of the potential risks,” he said.
What you do with funds matters just as much.
How to use small business financing
Small businesses need to be smart about putting outside funding to use.
“Small businesses need to think like investors,” said startup consultant Jonathan Mills Patrick, a former banking executive and three-times startup founder who has been involved in over $800M in debt and equity funding for entrepreneurs. “Taking on additional capital should preferably happen when there are available investments that can be made with that capital. For example, buying a new piece of equipment that will help satisfy increased orders.”
TeamBuilding’s Alexis suggests small businesses treat funds like their own business’s money. “Countless startups have raised millions of dollars and then burnt through it quickly. Instead, treat the money as if you have earned it, and then diligently invest it to earn back more,” he said.
9 small business financing sources
Small businesses can look at a range of different options for funding—let’s take a quick look at some of those.
1. SBA loans
You often have to be in business for a few years to secure a business loan. “It sounds paradoxical, but it’s because most lenders will require some proof of concept and viability before taking the risk,” said Jeffrey Zhou, CEO of Fig Loans. “However, it is possible to get a small business loan from the Small Business Administration (SBA), which will grant microloans of up to $50,000 for new businesses.”
Business bureaus, state programs, and non-profits often also offer special grants and scholarships.
TIP: Be sure to look out for dedicated programs for women entrepreneurs in the BIPOC, LGBTQIA+, and other under-served business communities.
2. Asset finance
This is a popular option for businesses that rely on specialist equipment or machinery to serve their customers. With asset financing, you can borrow to buy or replace an asset. And asset is a broad term here—think of your delivery trucks, your ovens, your fridges or your top-end computers and printers. The loan is secured with the asset you buy. That’s the collateral that lenders will recover if you’re unable to repay.
3. Bank lines
Or a revolving credit facility, if you want to give it another name. Think of this as a mix between an overdraft and a credit card,but for your business. You agree to a revolving credit facility with your bank. You’re given a maximum withdrawal amount and your business can access the funds at any time you need.
4. Receivables financing
Service-based small businesses can struggle with late customer payments. And accounts receivable can heighten concerns about cash flow. All up, they can be a real source of stress for owners,especially if things are already tough. Invoice financing can relieve some of this pressure because it allows businesses to use outstanding invoices as collateral for funding, or a ‘float’ of the invoice amount.
5. Government funding
Small businesses should seek outside funds through government aid, says Jim Prendergast, SVP of asset-based lending company AltLINE Sobanco. “In many states, there are government incentives to opening up your own business, which means they’ll usually help you financially. Though you can fund most of the business through your own money, it’s always wise to take advantage of any government programs available,” he said.
6. Emergency funding
Most governments created pandemic subsidies for small businesses, such as Canada’s subsidies for small business payroll and commercial rent payments. But be quick, as many of these programs are beginning to wind down, with application windows closing soon.
7. Venture Capital funding
VC funding can help your business cover ongoing operating costs, but it’s probably the most suited to startup or scaleup businesses with an identifiable potential to ‘scale up’. That’s VC-speak for becoming bigger, more valuable, more profitable and more attractive to future investors.
8. Family and friend loans
Funding from your own personal network is another option. That could be a friend, your partner or the good old-fashioned bank of Mom and Dad. Bear in mind that everyone should still know where their money is going. You’ll be accountable for repayments based on the agreed terms.
Another one for businesses that have a start-up feel. Fledgling businesses often turn to crowdfunding to validate product ideas and build an audience of potential future customers. Crowdfunding is as much an art as it is a science—and business owners will need to put some serious effort into marketing a fund-raising campaign if they want to reach their target amount.
Tips for choosing a funding partner
Whichever option you choose, bear these tips in mind.
- Understand your pain points and why you want more funding, said Michael Knight, co-founder of Incorporation Insight, which helps new businesses to incorporate. “If your business is experiencing slow periods, credit lines or a business loan may provide you with the working capital to keep going. If you want to fund business growth, consider equipment financing and leasing options if you need new equipment.”
- Choose a reputable source of external funds from partners that understands your industry. That’s a tip from Carol Tompkins, a Business Development Consultant at AccountsPortal, an online accounting software. “Also, choose a partner whose terms are fair, and who sees value in what you are offering to the market. Do thorough background research on each source before applying for the funds,” she said.
Lightspeed Capital: a new funding option for US small businesses
Recently, Lightspeed has partnered with Stripe to provide eligible merchants with financing of up to $100,000 (USD), to help them adapt with confidence to the changing realities of the retail industry. Merchants must be based in the United States and be using Lightspeed Payments in their retail business, to be eligible for Lightspeed Capital.
Is outside funding right for your small business?
The biggest benefit of outside funding is that you can keep your business moving without dipping into personal savings. “While there may be occasional expenses that pop up and can be easily put on your tab, draining your savings to cover startup costs can hurt your financial future. If something goes wrong or there are delays getting started you could find yourself without any safety net and a harmful blow to your credit score,” said Zhou of Fig Loans.
Interested in upgrading your retail business with the right technology, tools and financing partner? Talk to us to learn how Lightspeed’s complete commerce platform can help.