For every small business success story, there are twice as many abandoned entrepreneurial dreams. Many hopeful small business owners assume that ideating an innovative product or fresh business angle is the most difficult part of striking it out on one’s own. But in actuality, what comes after the excitement of devising a plan is the make or break point. Ideas are free, but turning ideas into realities requires substantial investments. As any small business owner can attest, to make money, you have to spend money – and, subsequently, to spend money, you have to have money.
Starting a company from scratch requires more than just brains and sheer determination. Investing in real estate, human capital, and equipment is a necessity. While some entrepreneurs are lucky enough to bootstrap their way into the market or find angel investors who believe in their idea, most small business owners must find alternate means to breathe life into their ideas. Creating a comprehensive finance plan is one of the most important steps to success for any budding venture. Luckily for today’s entrepreneurs, there are several available routes to obtaining the finances necessary to launch a business from the ground up.
The Small Business American Dream Gap Report found nearly 30% of small businesses find it difficult to reduce operating costs. Additionally, 20% have considered shutting down as a result of slow growth and cash-flow issues. To combat these financial troubles, small business owners are applying for loans in droves, but attempting to convince banks to back their ventures is a frustrating cycle. Often, this vicious cycle is a result of businesses not understanding their credit scores. Banks are not willing to extend loans on good faith – their practices are steeped in credit history, and both new and serial entrepreneurs who experience repeated difficulty in finding funding often don’t come to the table with stellar credit histories. While this process is frustrating, it has also opened entrepreneurs’ eyes to options beyond traditional loans.
Before we jump into financing options for entrepreneurs in today’s business landscape, let’s take a moment to explore the need for loans in the first place.
First and foremost, you need to ask yourself the following questions:
Taking the time to answer these questions in depth will point you to the best financing option for your business.
Most business require a workforce to meet the demands of consumers; the value of employees cannot be overstated. They are the faces of your company and the entities that facilitate the overarching customer experience. Whether your company sells a product or service, your employees play a major role in forging relationships with customers. Finding employees, onboarding them, and paying them, though, is no small task. Human capital is the most valuable asset of any business, but in order to maintain a strong team, financial investments must be made on a consistent basis.
Ask any business owner what the most challenging aspect of launching a business is and they’ll likely say talent acquisition and retention. Sure you can put up local ads and ask friends and family members for referrals, but finding employees who possess an interest in your business, a dedication to the position, and a desire to grow with your company is not easy. Recruiting takes time and money, but this investment is well worth it if it means finding a steady employee base that won’t turn over every few months.
From equipment and compliance training to customer service workshops, if you want your business to thrive, you must invest your employees through ongoing education and support. The good news is that human resources are a scalable component of your business. Often as your demand and revenue grows, you’ll have the financial means to increase your workforce. Unlike equipment purchasing, which is required up front in any business venture, your human resources are highly dependent on your current revenue and overarching growth goals.
Too often, business owners attempt to skimp on recruiting and training, but this only costs them more in the long run. According to a 2014 Deloitte Study, it costs nearly $4,000 on average to fill an open position. Of course this number scales significantly depending on the type of position, but if investment is not placed on human resources at the beginning of a venture, business owners will only open themselves up to greater long term costs – and headaches.
No business across any industry can thrive without equipment. While some businesses inherently require more machinery to bring a product or service to market, no entrepreneur can expect to enter the race without investing in tools and resources. Machines fuel businesses. However, some business owners fear potential sunk costs when it comes to investing in equipment.
Equipment loans can also be granted for smaller amounts, making them easier for loan providers to fulfill. Once you’ve determined how critical your purchase is, you may also factor in a tax write off of up to $25,000 (if you’re in your first year) in addition to the interest on the financing you take out to cover the purchase. Be mindful that equipment loan interest rates tend to vary between 8% and 30%.
If you’re still not open to the idea of accruing more debt through equipment purchases – or if you’re in an industry where equipment evolution occurs at a fast pace, then equipment leasing may be your best option. Leasing payments tend to come in at a significantly lower price point than a full loan. Plus, not having to commit to one model for an elongated duration may help your company stay on the cutting edge of your industry. Furthermore, equipment depreciates in value the moment it is purchased, and as leasing is a 100% tax deductible expense, this is often the stronger option for businesses looking to save.
Luckily, in today’s business environment, business real estate has become an increasingly flexible component of entrepreneurship. Since the advent of the Internet, more small business owners have been able to facilitate operations on the web, and subsequently, take up less space. Many entrepreneurs today, including those capitalizing on the shared economy and on-demand movements (i.e. ridesharing and food delivery), don’t necessarily need a physical office space to meet the demands of their customers. Furthermore, many entrepreneurs are also opting to start small in co-working rental spaces and prove the viability of their businesses before investing in independent spaces.
However, remote coordination and co-working are not feasible options for every business. For those business owners launching a customer service business, storefronts are imperative to connecting with potential consumers. Real estate costs are highly dependent on your business’s location. In some areas it is smarter to make an investment rather than leasing a space. If your business is located in an area with high growth potential, it may be in your best interest to buy a property. This, however, costs more up front as a down payment plus monthly mortgage payments are required.
Every entrepreneur dreams of walking into a pitch meeting with VC’s or seed funders and walking out with a check to turn their pitch into a product. Unfortunately, the process is slightly more complicated. It’s true that finding investors can be a strong financial option to boost your business. But finding the right investors is no small feat. Seed or angel investors are accustomed to seeing impassioned company pitches and it takes more than enthusiasm to convince them to sign a check. Entrepreneurs must have a clearly defined business plan, market understanding, and value proposition to procure funding. Additionally, entrepreneurs must be willing to meet investors halfway. Seed investments are only successful if both sides can benefit from the growth of the company in the long term. Even more challenging than selling a potential investor on why you and your company are worth their dollars, is finding an investor you can work with. Investors do not sign checks and hope for the best. Their financial commitment means that they have signed on to your company and have a say in future business decisions.
Recently, more entrepreneurs have begun experimenting with equity crowdfunding. Why? Well, first and foremost, crowdfunding offers immediacy. Equity crowdfunding is defined as a process wherein a group of people offer money to entrepreneurial ventures in return for company shares. People who partake in this type of crowdfunding become shareholders, and if the startup achieves success, each shareholder will see a return. Secondly, crowdfunding also enables entrepreneurs to share their ideas and venture goals with consumers and ignite interest and excitement. Crowdfunding can be as valuable of a marketing ploy as a fundraising option. However, it requires business owners to relinquish control. Often, new entrepreneurs rush into a crowdfunding model because they are desperate for cash in the short term and may not consider the long term implications of relinquishing full control over their company and idea.
The beauty of both seed investments and equity crowdfunding is an influx of immediate capital, but that immediacy comes at a long term price. It’s easy to be blinded by dollar signs, but if you feel strongly about your company’s potential (which, if you’re in the business of procuring funds, you probably do), it is wiser to focus on your venture’s potential lifetime profit. When you agree to equity terms, you’re essentially trading future profits for immediate cash.
Alternatively, financing is a viable option for business owners who want to exercise agency in the future of their business. Financing allows business owners to attain necessary finances without opening up the decision-making floor to investors. However, assuming a financing plan also guarantees debt. Most first-time business owners view debt as a dirty four-letter word. Racking up debt is made out to be akin to digging a business grave, but with careful planning, the opportunity cost for assuming debt from a loan is well worth it. Often times the opportunity cost for taking out a loan ends up being so minimal it’s insignificant.
Consider, for example, you’re a business that has just started up and is still acquiring the tools and supplies. You’ve just received your first big order, in which your business will gain $50,000 in revenue. However, to meet the demands of this order, you must first invest in $20,000 worth of inventory. Taking on a loan with an APR of 20% will amount in an opportunity cost of just $4,000. Although $4,000 may seem like a substantial amount at the beginning of a business’ life span, when it is put into context of potential earnings over the course of a business, it is a highly reasonable cost. On the other hand, if you choose to meet your initial production and fulfillment demands through equity fundraising, you could lose far more than $4,000 down the line.
For years, business lines of credit and bank term loans were the standard options most entrepreneurs sought. While these financing plans remain viable, they don’t necessarily support the immediate and dynamic nature of today’s business cultures. These more traditional options require strong personal credit and have long application processes. Entrepreneurs no longer have the luxury of time to sit idly by for months as banks work through loan applications. The startup is not only highly competitive, but also constantly moving, and entrepreneurs with original ideas or fresh perspectives on defined industries must act fast if they want to make an impression on consumers. Alternatively, online lending market options deliver fast-paced results based on the unique needs of a business. Long-term online business loans can gain approval in as little time as five days; short-term online business loan approval can occur as quickly as one day.
As you attempt to distinguish which loans to apply for and which offers to accept, you need to be honest with yourself about your financial needs. Choosing between short and long-term loans often comes down to timeline and financial needs.
Short-term loans are optimal for quick cash fixes. For example, if your business experiences an unexpected surge in customer interest and requires more resources to fulfill the order, a short-term loan may suffice. These loans tend to be granted for smaller amounts and the repayment timetable is expedited.
Long-term loans are optimal for business resources and investments, including employees, essential equipment, or product development. These loans are often given in larger quantities with an extended repayment timeline.
Many lenders require some proof of profitability, which means your business needs to have already generate revenue before beginning the application process. If you are a new entrepreneur in need of a loan just to get your business off the ground, you likely won’t be able to secure a line of credit or a traditional bank loan. However, without proof of profitability, you may still be eligible to procure a short-term loan, equipment loan, or startup loan.
It’s tempting to accept the terms of the loan without really understanding what it’s asking. After all, your business needs money to survive and this lender is making you an offer – can you really refuse? Well, yes. If a lender is not transparent about the repayment terms, structure, or timeline, it is often a red flag that they are not your best option. For you to succeed in meeting your loan terms and building your credit, you have to possess a comprehensive understanding of the value of your loan offer.
Once you’ve applied for loans, you should take another pause before accepting a lender’s offer to ask yourself:
Even if you don’t necessarily need financing at the moment, if you foresee needing to take out a significant line of credit in the next few years, it’s a good idea to take out smaller loans to improve your business credit in preparation. The beauty of procuring loans through alternative lenders is that you don’t necessarily need a strong credit history to receive approval. Additionally, these loans will help you build up your credit if you diligently adhere to the loan structure. Taking out small, short-term loans and paying them back on time, will slowly and steadily help you build your business’s credit score. If you project a national expansion within five years that will require manpower, machinery, and real estate, you’ll need strong credit to win the support of banks.
Additionally, facing the fear of debt and beginning the financing process early enables you to build up a relationship with a specific lender. This is especially effective when you work with smaller lenders, such as the partners of Currency Capital, who specialize in business financing and understand what it takes for businesses to succeed.
Regardless of your business or industry, exploring financing options is an imperative step to building a healthy and sustainable business operation. Currency Capital was created with the goal of helping entrepreneurs of all backgrounds see their dreams to fruition. We pride ourselves on helping small businesses succeed by providing the resources they need to match with the best lender available. Our technology streamlines your application and approval, and our support team is always here to help you figure out what the best option for you business’s needs are.
We’re invested in your business’s success – and we’re here as a resource to answer your questions and concerns. Reach out to the team at Currency Capital any day, any time.