However, there are only 3 types of capital that can fund your growth, and a huge variety of ways to get that cash (I’m going to cover 10 of them). But first...
THE THREE TYPES OF CAPITAL
- Cash—profits from the business (or your personal piggy bank).
- Loans—money you’re obligated to repay on a regular basis, regardless of how well the business is faring.
- Equity Investments—also known as Investors. Investors benefit from both profits and the overall growth of a company, but they’re only paid back if and when the investor can sell their slice of the pie (which usually happens when a new, larger investor purchases the company).
To be fair, people get creative with money, and there are some exceptions to the rules I’ve laid out (like crowdfunding campaigns that are treated by the IRS as income but which entrepreneurs treat as investments), but in the end, all capital can be placed in one of these three categories.
The key, however, to your successful growth is knowing where to get the money you need to grow, and matching the source of funds to your business’ needs and the stage of growth you’re in.
10 SOURCES TO GET THE MONEY YOUR BUSINESS NEEDS TO GROW
- Personal Savings: Preparing to launch a business? Start stashing away your cash now so you can support yourself while the business gains momentum.
- Business Profits: If your business is up and running, set aside a percentage of profits in a separate growth account—that you don’t touch—in order to accumulate the money you’ll need for expansion. The more cash you have in the bank, the easier it’ll be to grow without taking on debt or investors.
- Family and Friends: Even if your friends and family don’t have a lot to give individually, small amounts accumulated can make a huge difference. Plus, the act of asking, defending your ideas, and answering questions from Aunt Marge and Cousin Jo will be an invaluable learning opportunity for you as an entrepreneur. In the beginning you can structure these as long-term loans to the company and create a simple letter of agreement.
Start with your immediate circle, and also ask them to make introduction to anyone who might be helpful. That’s how you build a deeper network of people who can support your venture.
- Credit Cards: When you open your first business bank account, ask for a credit card. Be sure you use it and make regular payments to build your company’s credit rating so when you need more capital, you qualify to receive it. Build your company credit by registering with Dun & Bradstreet and supply the D&B number to your main vendors and suppliers (see below).
- Vendors & Suppliers: Identify your key suppliers early on. Order and pay as consistently as possible. When you’re ready to grow, ask for 30 day terms (or whatever terms match your company’s cash cycle). These terms effectively utilize your suppliers to help finance your growth. It’s good for them too, because as you grow, their sales also grow.
- Institutional Lenders: Banks & Small Business Lenders. These are for vetted businesses only—don’t expect a bank loan the day you hang your shingle. Institutional lenders will be most interest in making loans to your company after you’ve been in business for a few years and have a solid client base or steady revenue. Some banks are more likely to lend to small businesses than others, which is something you might want to keep in mind when you open your company bank account. (Read more about 3 factors to consider when choosing a business bank.) Non-profits and organizations that support entrepreneurship can often help businesses apply for an SBA backed loan or with finding a local bank that’s an active SBA lender. (In New York City Accion and BOCnet, are active small business lenders while the city’s network of Business Solutions Centers will help you apply for credit.)
- Online Lenders: Be very careful with these lenders. Many of them charge extremely high interest rates, but some are more creative and friendly. Make sure you fully understand the loan terms and repayment requirements. These are best used when you have a short term cash need (ie: can repay within a few months) or strong and stable receivables. Example lenders are: Fundbox, Square Capital and Fundera.
- Private Investors: Angel Investors, Seed/Pre-seed Investors and Venture Capitalists fall into this category. There are two ways to find them: personal connections and investor groups and platforms, like Investors Circle and Circle-up. If you’re thinking about seeking private investors, talk with other owners and learn from their experiences and attend pitch events or accelerator programs to learn about how to present your company and the opportunity. Again, make sure you have your finances in order. Plus, be prepared to hire outside experts to help shape the best possible terms for you.
- Crowdfunding: Crowdfunding has become a popular way to finance all sorts of endeavors. There are three types of crowdfunding.
-Reward based (see Kickstarter, Indiegogo or -- for food and beverage companies only -- PieShell)
-Loans (vist Kiva)
-Equity (check-out Crowdfunder, SeedInvest and a new equity platform on Indiegogo)
Crowdfunding is an excellent way to raise money and enlist your loyal followers to get more exposure. Caution: make sure your crowdfunding plan is designed to succeed with a realistic achievable goal based on your company’s strengths. To really hit it big a crowdfunding campaign takes a huge amount of planning, outreach and PR. Unless you already have thousands of followers, don’t expect it to be free. Include the campaign costs as well as the rewards themselves and the platform fees in your planning budget.
- Government Grants: Grants are sometimes available for business projects, especially if the project will create new jobs in targeted communities. To get started, look for workshops, announcements or direct help from a state, county or local economic development agency, or industrial development agency. Virtually every county, region or city has one dedicated to helping small businesses expand. The types of funding available varies depending on the type of business you are in -- but could cover things like new equipment, costs related to hiring and training new staff, even research and development of new products that meet a specific need (especially related to energy or the environment).