Brookings Institute, a nonprofit public policy organization, reports that new business formations fell off early at the onset of Covid-19 but are now on a track to outpace recent years. One of the key drivers is the multiple options available for business funding.
With the many different ways to raise the capital you need to grow your business, it can be hard to know where to start. The best place? Your strategic plan. No matter the funding option you choose, any new business owner that seek growth requires an excellent strategic plan to move from bootstrapping with your own capital to eventually attracting the funding that will help your business flourish.
Once you have your strategic plan in place you have the insight you need to make the best decision about the financing options your business needs. Be sure to consider your options carefully and evaluate each of the finance alternatives summarized below.
Friends and Family
To get businesses operational, entrepreneurs will turn to friends and family for assistance to get the ball rolling. From time to time, enlisting them as investors when businesses don’t make the cut for credit. But we all know the old adage to steer clear of “mixing business with pleasure!” When embarking on your business journey there is no guarantee of success. Therefore, the chance friends or family may not be repaid can make an uncomfortable situation for all involved. Therefore, the following alternatives may present better options.
Term loans are the best option for businesses seeking generous capital to reach a definitive asset and feed expansion with regular monthly payments for a particular term. This set-up is beneficial for planning your specific budget but can come with extra costs if fees or prepayment penalties are added.
Small Business Credit Card
This credit option functions on a revolving line of credit which means you are given a debt limit that you can incur and subsequently pay off, much like a personal credit card. This is a convenient short-term means that can benefit your credit score if used responsibly, and occasionally come with perks. If not handled responsibly debt can acquire quickly and interest rates can be higher with possible adjustable rates and annual fees.
Business Lines of Credit
Your business line of credit is much like a credit card that allows you to obtain money repeatedly on an as needed basis but typically at a lower rate as long as you pay off the borrowed amount within the terms. The agreement is similar to a term loan in that you can withdraw more than that of credit cards and repay funds on a predetermined repayment schedule but unfortunately can be at a varied rate.
Merchant Cash Advance
Almost any business that necessitates a small boost of capital quickly but are able to be repay quickly, can get approved for a merchant cash advance (MCA) in just a few hours as perfect personal or business credit scores are not required. A lender forwards a lump sum for a percentage of the daily credit card sales but at an exaggerated expense. You may have to pay for that short turnaround and superficial underwriting process with potentially dangerously high interest rates
Small Business Administration Loans (SBA loans)
SBA loans are advantageous for businesses to subsidize costly equipment or inventory investments offered by participating lenders backed by the Small Business Administration. Banks make these available at some of the lowest rates and on flexible repayment plans. On the other hand, the application process can take weeks or even months to process. And even if you have a perfect credit history, approval can be very trouble-some.
Small Business Grants
Small business grants can be difficult to come by, are frequently out of date, and have extremely strict eligibility and/or use criteria. Because the quantity of money available is restricted, competition for this sort of business finance can be brutal, BUT it’s free money! Merely qualify, apply and await the decision of funds allocated. If you have the time to await grant funding and a strong story to align with the grant opportunities you are applying for this can be a valuable financing option.
Seed funding is often considered the first official stage of equity funding. Investors offer capital in exchange for an equity stake in the business. Seed capital can be raised through friends and family, seed venture capital funds, angel investors and even crowdfunding (all further outlined below). The pivotal component here is that seed investors receive an agreed upon stake in the business or are offered a convertible note which has an agreed upon value.
Private Equity (PE)
PE most typically refers to investment funds that are most often organized as limited partnerships that buy and restructure companies. PE investments are generally made by PE firms, venture capital firms or angel investors that can deliver working capital to fuel expansion, new product development or restructuring of a company’s operations, management or ownership. In most cases PE firms buy the majority control of a company rather than minority investments more typical of venture capital or angel investor transactions.
Venture capital is a type of private equity investment offered by venture capital firms or funds to startups, early-stage, and developing businesses that have already shown great growth potential. This option is desirable when funding needs are much higher and is based on selling a percentage of business ownership and control for cash. Venture capitalists direct their attention on companies that can produce great returns which will typically rule out most small startup businesses.
Angel Investments are created for seed funding to up and coming businesses that have potential to prosper rather than startups that have gained traction that venture capitalists go after. Keep in mind, Angel Investors will invest their personal time and money to guide entrepreneurs but will typically require portions of future net earnings and a voice directing your company toward opportunity.
An equity transaction can be a structure used by many of the funding categories above (PE, venture capital and angel investors) where the borrower (you the business) issues shares of its capital stock or other equity interests in exchange for working capital.
A quick method of raising funding for a business through online campaigns is called crowdfunding. Customarily, this action for fundraising is based on donations or reward. Being this is all done online, this can offer you a position to build awareness for your company, product or service that can assemble supporters investing cash for your success. This approach is only as good as how much preparation you have done. Companies who deliver this service will draw their slice of funds for their marketing and time involved, and possibly withhold all funding if a predetermined goal is not reached.
The New Market Tax Credit (NMTC) Program
For businesses that can prove their support for a low-income community this is an interesting option. The NMTC Program seeks to offer credits for businesses that can prove how they are breaking cycles of disinvestment in communities where there are vacant commercial properties, outdated manufacturing facilities or inadequate access to education and healthcare as examples. Individual and corporate investors receive a tax credit against their federal income tax in exchange for making equity investments in specialized Community Development Entities.
Federal Opportunity Zones
Another interesting tax consideration is the Federal Opportunity Zone. If you can demonstrate that your tangible business property is located within a qualified opportunity zone you can receive the deferral of capital gains taxes, reduction of capital gains taxes or even the elimination of taxes on future gains. The purpose of this program is to spur economic growth and job creation in low-income communities.
Considering your business funding path can be overwhelming with many complex decisions. When you are ready to proceed with confidence, UnniCo Ventures is here to help. Our experts know all of the options at your disposal and can help you build the strategic plan to capture the funding you need for your business growth. We will help you break down barriers, implement and accelerate projects, and unlock your potential with the funds you need to make your business successful.