Grow business with funding

What You Need to Know Before Pursuing Small Business Funding

Of course, you want to grow your B2B small business. That might be tricky to do if you’re like those businesses surveyed in Wasp Barcode’s State of Small Business Report. More than half of the respondents plan to invest fewer than 3 percent of their revenue on marketing. In this case, it should be no surprise why growing revenue is the No. 1 challenge for small businesses.

To do marketing and other activities to help you grow your revenues requires having cash flow. That old “It takes money to make money” is absolutely true.

Before you go bank loan shopping to get money to grow your business, make sure you have explored all possibilities. A bank loan takes a lot of time with meetings, paperwork, and waiting. You may have better options. Hey, your small business may not even need a loan.

Do you really need small business financing?

Here’s a story of a business owner that I read about in the local paper. She had an approved Small Business Administration-guaranteed $25k bank loan. Her plan was to use it for leasing space that she had already found. In fact, she had met with contractors to redo the space.

She turned down the loan and opted not to take the lease. While working on the business plan, she decided to change direction with her business and instead invested $2k of her own money in her business. This emphasizes the importance of having an updated business plan that outlines growth plans and staffing needs as well as how the business would get working capital to ensure it has cash flow.

When a business realizes it needs money to make something happen whether it’s growth, more space or other expansion activities, a loan is often the first thing that comes to mind. With all the paperwork and time it takes to apply for a loan, it’s worth stepping back and reviewing your business and its plans.

Best ways to get cash to help grow your business

What are some options for business finance without going to a big bank? Here are five ideas to help.

1. Your business

Sometimes the answer lies within the company and the company doesn’t need a loan — at least, not now. Before exploring business finance options, see if the cash may be available somewhere in your business.

“But if the cash was there, I wouldn’t go looking for business funding or a bank loan,” you think. True. You might look at 7 ways to increase cash flow without new clients. It’s also worth taking the time to review how your cash flows in and out of your business. Finding working capital within your business is better than opting for a loan with interest and fees.

2. SBA loans

Guaranteed loan programs from the U.S. Small Business Administration can be a good option for some companies. The SBA doesn’t give loans. Rather, it sets the guidelines for loans made by its partners including lenders, community development organizations, and micro-lending institutions. Because SBA guarantees these loans will be repaid, this takes out some of the risk for lenders.

You can learn more on the SBA loans and grants page, which tells you about SBA loan programs and government grants. It provides facts, connects you with lenders, tells you where you can find grants, and shows you how to prepare for a loan.

3. Private lender

Private lenders provide loans like banks do except they have different policies, rates, fees, and plans. They also aren’t at the mercy to stiff regulations like banks are. However, they may ask for collateral, a problem for B2B professional services businesses.

Some private lenders use banks to bankroll their loans. In order for the private lender to make money, it needs to charge more than a bank would. It can be easier and faster to get approval from a private lender than from a bank. Unfortunately, it means paying more.

4. Community and small banks

You have a better chance to get more flexibility from small, regional, and community banks. What’s more is that they tend to offer more personal service. If you plan to contact any kind of bank, visit to do a check on the bank for a consent order. Any bank that has a consent order is under close scrutiny because it has problems to fix.

Another item to look at is the Texas ratio for the bank. You want to make sure the bank doesn’t have a score of more than 150 percent. The Texas ratio is “a formula that measures the health of a bank based on its credit troubles.”

5. Financing from accounts receivable

If you can’t find cash within your business, another option is to sell your invoices to a factor at a discounted rate through factoring. Unlike a bank loan, invoice financing doesn’t involve interest rates or paying back the loan.

This type of business finance is also referred to as factoring or accounts receivable financing. Factoring involves a factor, which is the third party that buys your invoices at a discounted rate. This type of business funding has some fees, but some factors may deduct that from an invoice rather than expecting you to pay up front. In other words, you don’t have to shell out anything to get your money. You’ll see less of what the client owes you.

Businesses selling your accounts receivables to get cash faster to pursue opportunities or to balance the company’s cash flow. Let’s say a company produces an invoice for $10k. Rather than waiting 30, 60, or even 90 days for the client to pay the invoice, the factor sends $8k to the company within a few days of receiving the invoice. (Sometimes within hours, if you work with the right factor.) After the client pays the invoice, the factor releases the remainder minus fees.

Even though the company doesn’t get $10k, the trade-off is getting the cash much faster. For getting the money now instead of 30 days from now, it will cost them $300 (when all is said and done). So, if they choose to ask for funding on Day One, they get $8k on Day One. Then on Day 30, they get the balance of $1,700. During that 30 day period, they will have been able to generate more business with the $8k than if they didn’t have that money.

It’s amazing what people can do to grow their businesses when they have more working capital cycles. And that’s only part of it. The weight off their shoulders about worrying about when their customers are going to pay, for example, is enormous.

The working capital cycle works like this:

A $1.2 million company with a 30-day cycle does the work, invoices their customers, and gets paid all within this 30 day period. That means they can turn their working capital 12 times a year. If the company has a 45 percent gross margin, that means out of the $100k they turn every month, they make $45k in gross profit, which is $540k per year.

What if they did nothing more than get paid faster? Say, every 20 days? That means they can turn their working capital 18 times:

18 x $45k = $810k in gross profit per year.

When they have more money to get more business, they do grow their business. Every time.

Not all factors are equal. Do your research. Ask questions about small business funding.

Image credit: Picjumbo

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