When you need to hire additional staff, secure funding for new business or an additional location, or develop a new product or service, you need money. If your cash position is strong enough, you may be able to fund it yourself from business proceeds. Or you might seek a traditional bank loan, but big banks only approve about one-fifth of small-business loan requests.
There are other places to find funding, including:
- Partner/investor. If you’re open to selling off some equity, you can offer ownership in exchange for capital. Bringing on a partner brings additional funds and in many cases expertise that can help you sustain or grow your business. This decision may change the legal form of your business, so check with your attorney for a full understanding of what’s required.
- Direct public offering (DPO). With a DPO, you sell shares directly to customers, supporters and anyone else who wants to buy, although some states limit investment only to people within the state in which you operate. This option is less cash-intensive (about $25,000 by some estimates), but does have strict eligibility requirements. A DPO makes the most sense for owners trying to raise $500,000 to $5 million. It can be time-consuming for the owner. Although you don’t need an investment banker, per se, you might want to use one -- and you definitely need an attorney who specializes in this kind of transaction, as there are several types. Fun fact: Ben & Jerry’s started with a DPO.
- Initial public offering (IPO). If you’re looking to raise more than $5 million, consider an IPO and sell shares on a stock exchange to “qualified” buyers. This option is expensive (by some estimates as much as $1 million) and complicated. IPO’s are heavily regulated and dramatically change the way you do business. Doing an IPO requires the services of an investment banker and an attorney.
- Crowdfunding. This popular, user-friendly investment vehicle leverages social media and digital technology to enable people anywhere to invest in your campaign. An estimated $5.1 billion was raised online in 2013, according to the Crowdfunding Industry Report. With rewards-based crowdfunding, people “invest” in exchange for products or activities, but they aren’t shareholders. By contrast, equity or investment crowdfunding, investors actually buy equity or debt ownership stakes.
- Alternative lending. Online alternative lenders typically charge higher interest rates (8% to 24%), but they’re less onerous than merchant cash advances. They usually require business assets or a personal guarantee as collateral. According to data from Biz2Credit, alternative lenders approved about 64% of loan requests from small businesses.
There are two other ways to get funding, but they are drastic and not widely recommended except in extreme circumstances. Many small-business owners consider using credit cards or lines of credit for financing, but that can be expensive and unwise. Another option is a merchant cash advance from a nonbank lender who advances cash against a percentage of future sales, usually between 10% and 25%. This option is costly and is most often used by business owners whose cash flow prevents them from keeping to a regular payment schedule. It’s widely considered the least desirable option. Before choosing credit or cash advance, check with your banker and CPA.
There are few more important responsibilities than properly funding your business for sustainability and growth. Explore the options with your professional services advisers -- banker, accountant and attorney -- to make the best decision for you and your business.
This information is not intended as a substitute for professional legal, financial, tax or accounting consultation; we provide it “as is” without any representations or warranties, express or implied. There are strict state and federal laws and regulations pertaining to raising and utilizing funding. Always consult financial, legal and accounting professionals when you have specific questions about any business matter of this kind.