Written By Heath Wruble
You own a business, and you want to continue to grow and expand, you have a steady stream of revenue, but not enough in the bank to make the improvements needed to take your business to the next level. Unfortunately, you just do not have the funds to get there, right now. What should you do to get the funds required to expand or to purchase the next round of inventory? You may understand the world you live in and work in, but do you have trouble when it comes to navigating the world of business funding? I get it, so do I, it’s a complicated subject matter.
There are so many scenarios a business owner may face, from finding the right employees to getting the best equipment. After all, owning a business is hard work, with long hours, and yet you can’t always do all of the work yourself, sometimes you need some help. You have accomplished so much, you have worked so hard to get this far, yet that next phase of your business is just around the corner, it’s at your fingertips, all you need now is the funding to expand and to grow. You may need additional space for your growing business, or you need the funding to buy that next piece of equipment to improve your productivity or you may need some extra funding to order new inventory for the summer season. What do you do? How do you go about growing so you can get to that next phase in your business cycle? The questions may haunt you at night, you just do not have all of the answers, right now. You know there is room to grow, you believe in yourself, as do others, if only you had that one essential piece of your business in place right now. FUNIDNG!
Growing to the next level can be one of the most challenging parts of any business and finding the right funding can be even more complicated, especially if this is your first time seeking out a funding source.
Access to funding is essential to any business especially a growing business and it requires many hours of your day to weed through the various sources of funding and getting knowledgeable on each specific aspect of the mechanics of funding.
You do not have to be limited when it comes to funding your company, do not just think of your local banker, try thinking outside the box. Below I will outline some options for your business, not all will be viable nor appropriate for your needs, however, hopefully it will provide you with more insight on finding the right source to fund your business and the right partner to help you get to that next level.
It will take you some time to digest each option and make the right choices, you should do your own research, look sources up on the internet, get to know the people offering you funding and understand the complex nature of each deal, but do not get discouraged there is often an option right for you and your business needs, just around the corner.
Alternative lending has become a booming business as banks and other traditional funding sources have made it more difficult for small business to get the funding needed. There are several reasons for this, some are government related, aka regulations, some are a result of the 2008 financial crisis which caused banks to scale back their lending and ramp up their stringent lending requirements and some is a simple risk vs return approach by funders, the smaller the business the larger the risk while larger more established businesses offer the funder less risk and greater rewards.
This is great news for business owners is that there are no shortages on finding funding sources online and in your neighborhood, but the overall risk to you is trying to identify who are the people offering you these great “deals”. The amount of information can be intimidating, how do you cancel out all of that excess noise?
When the idea of helping small business owners understand the fundamentals of funding by writing an article, my research started to get complicated. The Funding world is constantly changing, and frankly I was overwhelmed. As a business owner, I knew the fundamentals, I went through this process several years ago, I have even loaned money out to other small business, however within the last few years the funding environment has changed. A simple online search for business funding yielded hundreds of websites offering their services and the services varied from one company to the next. Which ones were legitimate and which ones would I want to stay away from?
Luckily for me I didn’t have to go far for detailed information, I contacted my cousin, Daniel Wruble, he is the CEO of Peach State Solutions and Funds 4 Less, both offer funding services. He gave me sound advice; he said the internet is a great way to get a basic understanding of the various funding sources available, but if you really want to get the best funding and understand all of the risks associated with each loan, it is better to speak to a funding expert. The amount of information Daniel imparted on me was impressive and it gave me great pride knowing that my cousin, who I used to babysit for, is now a funding genius. He also was kind enough to allow me to speak to several of his funding officers, each one was knowledgeable and amazingly answered my probing questions, with patience. I could tell right away that they knew their business, took pride in their work, and cared about their customers. One of the most important lessons his team imparted on me was to be prepared before discussing your funding needs with an expert. To help their customers, the funding officer will need to know the type of business you have and most importantly what you need the funding for. It’s not because they are being nosey, but because in order to get you the best source of funding, they need to understand what you will use the money for. As an example, if you need the money for inventory, they may be able to get you funding in which you pay back the “loan” with the proceeds to the revenue from the inventory, or if you need equipment, perhaps the money being borrowed is backed up by the actual equipment. There are various sources of funding and depending on your situation these officers can work with you to find the best, cost effective, and perhaps most efficient source of funding for your particular needs.
When you are sourcing your funding needs, do not be embarrassed if you do not understand what is being presented to you, this is your livelihood, and you want to make sure you completely understand the risks associated as well as all of your options being presented. One of the funding officers at Peach State Solutions stressed that his goal was to empower his clients to become better financial experts, he encouraged his clients to ask as many questions as they could and that no question was too big or too small to ask. Mark understood that finding funding for your business may be a stressful time for his clients and he wanted to create a comfortable atmosphere and hoped that his clients would not only consider him part of the team but like family. Ian informed me that when he talks to his clients he treated them as if they were part of his family, he did not want those clients to walk away upset, the most rewarding feeling was to watch his clients business prosper knowing he had a small part in that growth.
I will attempt to break down the various funding option for you, but if you are a small business looking for funding, I would recommend reaching out to someone like Daniel or his team, someone who is knowledgeable, trustworthy, and has the patience to explain the various funding available for businesses. Each business is unique and there are many options available for your funding needs.
There are various types of funding - short term, long term, equity, or debt funding - which is the right funding option for you and your business? Talking to a qualified funding expert will lead you in the right direction.
Learn more Below
Short term financing is a loan lasting less than 18 months, these loans are typically underwritten quickly and paid back within an 18-month period (with some extensions in certain circumstances), these types of funds are generally used for working capital or emergencies, so for example if you were building an extension on to your warehouse, a long-term loan would be a better option for your business than a short-term funding option. The interest you may pay on short term loans can vary from fair to extremely high which is why exploring your funding options with a qualified funding expert maybe the best approach.
Merchant Cash Advances (MCAs) are a short-term advance which is paid back as a percentage of revenue typically in the form of your bank or credit card processing daily receivables, basically the sponsor (the bank or financing company providing your business the funding) will purchase at a discount revenue received into your bank account or through your credit card processing machine. This means for every credit card transaction you ring up daily, a percentage goes to paying back your loan. As an example, a business needs $100,000 in a short-term loan, the MCA will advance you $100,000 at a 1.2 factor rate and a 15% split, this means that you are required to pay the lender $120,000 (the advance plus interest) within the 18-month period, in order to do that they will take 15% of your credit card sales daily. As a side note this type of funding is NOT a loan but a sale of your future receivables.
Line of Credit is a credit facility extended by a provider to a business which enables the business to draw on the facility when funds are needed, typically, a business is required to provide to the facilitator that the business has been active for at least a year, a credit score above 600, with an active revenue stream.
Receivable Financing is a way to fund your business by pledging your receivables as collateral. It basically breaks down to this, you send out invoices which you sent to your customers, they have an obligation to pay you for the products sold to them and invoiced, as a business owner you sell the right to the receivable for an upfront loan. As an example, you are company XYZ and sold widgets to the ABC company, you send the widgets to ABC with an invoice for $10,000, ABC has an obligation to pay that invoice within a 60-day period. While you wait for the money, you need funds to continue to operate, you sell the rights to the invoice at 80% meaning that you receive $8,000 from the funding company, in 60 days ABC send $10,000 to you which is then transferred to the funding sponsors, thus they made a $2,000 profit in 60 days. This is a simple rendering of the transaction; in most cases the funding firm will not take the entire $2,000 profit but you should get the idea of the overall process. Another option is Invoice Factoring, which is the same concept as receivable financing, except rather than pledging the receivables as collateral, you sell the invoices and the sponsor, and they collect the receivables.
ABL Credit Lines, is an asset-based lending funding option, but is lender and industry specific. You own a dry cleaner and need a new pressing machine, it’s an asset and is worth $50,000, you obtain a loan to purchase the asset, the lender holds a lien on that equipment, if you are not able to make the appropriate payments the lender will be able take possession of the equipment or if you try and sell your business the lien on the asset will be recordable to the purchaser and it may complicate the process.
Longer term funding resembles the typical type of funding options you are more accustomed to, these types of loans usually take much longer to process and require a great deal of paperwork, however the interest owned for each type of long-term funding mechanism will be lower than the short-term funding. Additionally, these type of funding options tend to require some form of collateral or personal guarantee.
Term Loans is a type of funding product which are repaid in regular payments over a period of time, typically between 1 and 10 years (which is why it can be either a short-term financing solution or a long-term solution), however some term loans may be as long 30 years. These loans tend to have floating interest rates, meaning, as interest rates go down, so do your interest payments, however when interest rates rise your rates will go up as well, this may add to your balance. The ability to spread your repayments out over a period of time is an attractive option for some business owners, especially if the business is expanding, with the assumption that revenue will also increase overtime, making repayment easier.
A Working Capital Loan is a type of loan used to fund everyday business operations, they tend to be a more flexible loan option for businesses which need cash quickly in order to cover immediate business expenses, although they tend to be long term in nature, they should not be treated as a long-term funding option for a business expansion. These loans typically have lower interest rates.
An SBA Loan is also a form of a term loan, except these originate at certain banks which participate in a larger program backed by the Small Business Administration. Because banks are not responsible for the entire loss of the loan if the borrower defaults these loans offer a much lower interest rate than the typical term loans detailed above. In order to qualify for an SBA loan, you will need to demonstrate a need of funding as well as a planned use for funding and a detailed description of your business. There are certain funding standards for specific industry types and finally as the owner of the business you will need to prove you have enough equity to invest in the business, aka, you must have some skin in the game. With a SBA loan you typically have a lower down payment, have better terms than a typical bank loan, have extended terms and much more flexibility in paying the loan back.
Small Business Lending Fund is a US Department of Treasury program dedicated to providing capital to qualified community banks and community development loan funds to encourage small business lending. You can inquiry with your local community bank to determine if they are participating in this program and if you are you can work with the bank to see if you qualify.
Equity Financing is the process of selling equity (stock) to investors. In exchange for investing in your small business, the investor receives an ownership stake in the business.
Crowdfunding is a similar take on Equity Financing in which you go to a crowd funding web site and sells equity to a larger audience in smaller stakes.
Peer-to-peer funding is another option in which similar businesses or owners in your industry will loan money out to each other.
The funding varies from one firm to another, however, typically requires a business to provide an application with three months of bank statements, some institutions require more information in order to better determine your businesses cash flow. As previously mentioned, each business is unique, and the financials and other details provided during the application process will tell a story about your business operation, including revenue generation and spending flow. When an underwriter examines the business financials besides getting to know you and the business, they are also able to better determine various funding requirements, needs and the ability to payback the loan.
Now that you have a better understanding of funding, you as a business owner should sit down and determine how much funding you need, how much debt you can carry without affecting your bottom line, create a detailed plan to utilize the funding, a payment plan, and the time horizon of your particular need. Once you have a better handle on your needs then you will be able to discuss your situation with an expert. If you don’t know one, call Daniel and see if he maybe the right fit for you, if not he will surely know someone that will be able to fulfill your funding needs.
The funding varies from one firm to another, however, typically requires a business to provide an application with three months of bank statements, some institutions require more information in order to better determine your businesses cash flow. As previously mentioned, each business is unique, and the financials and other details provided during the application process will tell a story about your business operation, including revenue generation and spending flow. When an underwriter examines the business financials besides getting to know you and the business, they are also able to better determine various funding requirements, needs and the ability to payback the loan.
Now that you have a better understanding of funding, you as a business owner should sit down and determine how much funding you need, how much debt you can carry without affecting your bottom line, create a detailed plan to utilize the funding, a payment plan, and the time horizon of your particular need. Once you have a better handle on your needs then you will be able to discuss your situation with an expert. If you don’t know one, call Daniel and see if he maybe the right fit for you, if not he will surely know someone that will be able to fulfill your funding needs.
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