Small business advice: Determining the right capital for every stage of growth


Many entrepreneurs rely on credit cards to get their firms off the ground. But is that the best financing option for your particular company? (David Paul Morris/Bloomberg)
January 3

Many first-time business owners are understandably bewildered by the many financing alternatives available on the market —and there are now more options than ever. In fact, there are financing opportunities available no matter what stage your company is in, whether it’s the smallest of startups or an established, midsized player.

The key is to know which avenues are best for your company to pursue. This is largely determined by business size, business credit, and assets available to leverage.

Here’s a guide to choosing the right type of capital for every stage of business.

Capital for startups

Virtually every company begins the same way: with zero revenue and zero employees. The startup phase is both stressful and exhilarating; if you’ve just started a company, chances are you’re passionate about the product or service your new company is providing. In fact, passion may be your only asset.

But the good news is that it can be leveraged. As an entrepreneur, you should use every bit of what you’ve got to get your business off the ground. In the beginning, this often means working long hours without a salary. It also means using your own resources: your personal savings, 401(k), and perhaps a personal credit card or home equity line of credit.

After those avenues are exhausted, then you can ask others to invest their time and money. Loans from family and friends continue to be one of the most popular forms of financing for startups and microbusinesses. If you go this route, be sure to make it official: sign a promissory note agreeing to terms of the loan before any money changes hands.

Other often overlooked sources of capital are terms and dealer financing. If you can obtain equipment on an interest-free payment plan, or work out discounted or deferred terms with a landlord, you’ve essentially secured a great loan without ever stepping foot into a bank.

Capital for small businesses

Once your company is older than brand-new, more external options are available. If you are seeking a loan for around $50,000 or less, keep the term “microloan” in mind. Companies like Lending Club and Kiva provide crowd-based microloans for small businesses. Community Development Financial Institutions (CDFIs) can assist in small loans as well.

If your business has inventory on hand, you could also consider a company like Kabbage, which provides inventory-backed loans. If your business has a product for sale, you can pre-sell those products via crowdfunding sites like Kickstarter and Indiegogo.

As your business becomes larger and more established, it becomes easier to get traditional bank loans. One recent survey showed that businesses with under $500,000 in annual revenue are successful in securing bank loans only 19 percent of the time, while businesses with over $5 million in revenue have a much higher 75 percnet approval rate. The SBA guarantees bank loans for small businesses, and recently abolished the fees for loans under $150,000, which is good news for business owners. As your business grows, it’s a good idea to establish a relationship with an SBA-approved lender who can advise on what types of loans you may qualify for.

Capital for medium and large businesses

Looking for a big loan? You’re in luck. Not only are interest rates historically low, but as a whole, U.S. banks have increased the total pool of large business loans (defined by the FDIC as loans over $1 million) by 23 percent from 2007 to now. Of course, to qualify for the best terms you’ll need sizeable business assets and a strong business credit profile.

Securing capital has always been one of the least-favorite tasks of business owners, but there are more sources of capital available than ever before, from the old-fashioned (begging and borrowing) to the ultra-modern (crowdfunding). Considering the options best suited for the life stage of your company will yield the most successful results.

Jeff Stibel is Chairman and CEO of Dun & Bradstreet Credibility Corp. and author of Breakpoint and Wired for Thought.

Follow Jeff Stibel and On Small Business on Twitter.

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