All small businesses face the same obstacle at one point or another: funding. No matter how great the service or work ethic, no business can survive operating without the right cash flow. In fact, the second biggest reason why small businesses fail is running out of money (according to CBInsights).
So how do you avoid being part of this statistic? First, let’s go through the basics of capital funding and explain some traditional methods of securing working capital. Then we’ll cover a couple popular solutions available today. By the end, you’ll feel confident about the options and risks involved in the various cash flow solutions we’ve presented.
What is Capital Funding?
The term “capital funding” can sound intimidating, but it simply means getting (funding) the cash (capital) that you need to operate your business. This funding includes day-to-day expenses—like payroll, supplies, and equipment—as well as long-term costs like product development and renting an office. Obtaining and maintaining funding requires strategy so you don’t sacrifice the long game to get your business out of a temporary cash crunch. Time to cover the pros and cons of a couple traditional funding methods next.
Traditional Methods of Cash Flow Funding
There are a handful of sources to get the funding you need to either grow your business or get out of a lean period. The amount you need and the date you need it are significant factors in the likelihood of successful funding, but they aren’t the only factors. Getting funding isn’t just about whether you have a solid business, proven market research, or a solid work ethic. Factors like your personal credit score (if your business is new), years in operation, surrounding competition, and much more can play a role when you ask a bank or investor for money.
Let’s dive into some traditional funding methods. Pay attention to the debt risks and potential trade-offs so you can feel confident in your funding strategy.
Traditional Bank Loan
There are a couple of funding options at the bank, either through a credit card or through a non-revolving loan. Both of these will likely use your personal credit score for reference if your business is less than five years old. In some cases, your personal credit score is still heavily considered even if your business is more established. This can be an added challenge that’s important to keep in mind.
One of the easier bank-backed methods to qualify for is a business credit card. However, keep a close eye on the limit and interest rate. If your business credit card has a high interest rate and you’re already strapped for cash, making the minimum payments on that card won’t help; in fact, you may get yourself into a deeper cash crunch than before. Another item to note is that many new credit cards have relatively low limits, which means you may not even have the amount of credit you need to purchase supplies, pay bills, or keep your business running.
A non-revolving loan is like a mortgage or an auto loan. The bank considers your credit and the asset (house or car in this example) and then decides how much they will pay towards the asset. You get the lump sum to pay for the asset, then you make payments back to the bank. Even for business loans, the time from application to funding in your account can take weeks. You will also pay interest and the loan adds new debt to your liabilities.
Every small business owner’s dream includes a long line of low-maintenance, high-balance investors. But unfortunately, that is rarely the reality. You may be asked to sacrifice more than you bargained for with either venture capitalists or angel investors.
Venture capital groups usually target specific industries (like technology or software development) and are located in areas like San Francisco or New York City. They are constantly getting requests for funding, so you’d be up against a long line of other businesses vying for money. You need to network hard to even be considered, and then even then, odds of approval are low. If approved, venture capital deals often involve giving away a significant percentage of company ownership or employing one of the funders. That means you get your working capital, but you also have to let go of making the decisions.
Angel investors also fill the entrepreneur’s dreams, but they are even more rare. You can try your luck, but make sure to have a solid plan B or C before chasing the angel investor unicorn.
Asking Family and Friends
Unlike dreaming of venture capitalists or angel investors, no business owner dreams of the day they’ll need to ask their friends and family members for money. While it is definitely a good idea to keep your eyes open to any funding opportunity, doing business with family or friends can often be messy. You also will have a lot more riding on success when you see the people who backed you at Christmas and Thanksgiving.
New Ways of Cash Flow Funding
As the world of business evolves, new ways of funding have emerged. The following options don’t require accumulating debt or giving up company ownership.
Crowdsourcing has recently gained a lot of media coverage through platforms like Kickstarter and GoFundMe. These platforms allow businesses or individual people to show off their ideas or explain why they need money and then receive anonymous funding from people worldwide. Crowdsourcing can feel more accessible to the younger generations, but it still takes a lot of luck and the ability to pitch your company/idea/funding needs digitally. Crowdsourcing can also take a long time to reach your funding goals, so it may not be the best option for a quick cash flow turnaround.
While invoice factoring isn’t necessarily a brand new idea, it is a great option that many companies don’t take advantage of. Invoice factoring is a cash model where you sell your uncollected invoices for a small portion of the invoiced amount to an invoice factoring company. They then pay you the remaining worth of the invoice right away so you can make payroll, rent, or restock supplies. The invoice factoring company collects the amount of the invoice from your customer, relieving you of the chore of chasing down unpaid invoices each pay cycle.
Invoice factoring doesn’t rely on your credit score, your ability to network, or viral crowdsourcing luck. It can be affected by your client’s credit score (if they have a history of not paying you, then the invoice factoring company is unlikely to foot the risk). But overall, it’s an excellent tool available to get more working capital on your terms without waiting weeks for the money to be in your account or going through a laborious process of applying for a loan.
Cash flow is one of the biggest obstacles that all companies face. As a business owner, only you can determine how to raise money to get your business out of a cash flow crunch.
We’ve covered a handful of common ways to increase your cash flow. Each option has positives and negatives, but invoice factoring is often the fastest option with no repayment, no loss of business ownership, and no added debt.
How is your current cash flow? Are things too tight for comfort? If so, TBS Capital Funding is here to help! Even if you’re not feeling strapped for cash at the moment, tuck us into your pocket as a future resource. Cash flow shouldn’t be keeping you from making payroll or buying supplies. TBS Capital Funding gets you cash from outstanding invoices fast, so remember that before opening a new credit card or asking Aunt Jane for money at your cousin’s birthday party.