There are no guarantees in the business world. Even if you have an amazing idea, an experienced and talented team, and an innovative product or service that people genuinely need, there’s a chance your business could run out of money and collapse.
Small business owners typically fight against this by securing financing, injecting their business with more money they can use to invest, develop new products, and grow the.
Is your business prepared for the next round of financing?
Funding Rounds for Small Businesses
First, let’s talk about different “rounds” of funding for small businesses.
Startups and small businesses usually secure funding at different stages of development for different purposes. There are no hard rules for when and how you can look for funding, but these major funding rounds may help you solidify your financing strategy and allow you to make a better pitch to your potential lenders and investors.
- Seed funding. Seed funding is usually distributed to startup entrepreneurs during the earliest stages of business development. At this point, your business may not be selling products or services to customers directly; you may still be putting the foundation of your business in place. This money is usually a small amount meant only to get you started.
- Series A. Series A funding is still provided early in your business’s development, but at this stage, you have some solid infrastructure in place. You have core products and services to offer, and you may have a small base of paying customers as well. However, your business isn’t established enough to reliably exist on its own.
- Series B. Series B funding is usually intended for a growth initiative. At this point in your company’s development, your business is capable of supporting itself, but you need the extra money to expand to a new market, offer a new product, or grow the business in another way.
- Series C. Series C funding is typically provided to companies that are already well established. They make plenty of money and have become entrenched in the industry, but they need additional funding to continue their ambitious growth.
Financing for Small Business: The Plan
Before you start shopping around for small business financing options, you need to have a plan in place.
Answer the following questions:
- How are you going to spend the money? What is the purpose of this money? Are you investing in a new product? Are you going to buy a piece of real estate for the business? Are you just trying to make ends meet while you attract your first clients?
- How much do you need? How much money do you really need? Too often, entrepreneurs and business owners seek the maximum amount of money they can get rather than making a specific ask based on what they know about their current situation.
- How will this benefit your business? Why is this investment going to help your business succeed? Is this going to lead you to new opportunities to make money? Will this make your business more profitable? Is this going to help you get through a temporary slump?
- How will you pay this money back? Finally, have a plan for how you’re going to pay this money back, if you’re seeking a conventional loan or something similar. Assuming things work out as you plan, how long will it take you to get back in good financial standing?
Preparation for Financing a Business
If you’re ready to start shopping around for business funding, execute the following:
- Check (and improve) your credit. Check your business credit score, and if possible, work on improving it. It may also be prudent to check your personal credit score and improve your personal finances. Some types of funding may be unavailable to you if your credit score is too low.
- Write out a plan. You’ve already put together a plan for your business financing – now you need to formalize it. Banks, investors, and other financing sources want to see documentation covering what you’re going to do with this money.
- Gather financial documents. Proactively gather the financial documents your investors or lenders are going to request. Financial reports, tax returns, and bank statements are typically required.
- Talk to investors, partners, and shareholders. Talk to your partners, investors, and shareholders about your funding requirements and financial options.
- Determine your funding strategy. At this point, you’ll be ready to decide on your funding strategy. What types of funding are you considering? We’ll cover some of the most common in the next section.
How to Finance a Business: Options for Small Business Finances
Fortunately, there are many business funding options to choose from, each of which is associated with strengths and weaknesses.
- Loans. Conventional loans allow you to borrow money under specific terms and conditions, and typically, you’ll pay back this money in installments over time. Loans come in many shapes and sizes, and you can even get some through the SBA. Note that you can take out loans as a business or as an individual, but personal loans put you at greater personal risk.
- Lines of credit. Lines of credit function like flexible loans, allowing you to borrow from a persistent pool of funds and pay back what you borrow iteratively. They’re typically more flexible than conventional loans, but you may not be able to borrow as much. Check the terms and conditions carefully before accepting the deal.
- Angel investors. Angel investors are individuals who provide funding to your business, but they may ask for a share of equity in exchange for their investment. In some cases, angel investors may insist on being more involved in decisions relevant to the business.
- Venture capital. Venture capital firms are similar to angel investors, but they usually take the form of a company or collective. Venture capitalists are often interested in investing in companies with propensity for extreme long-term growth.
- Crowdfunding. For some businesses, crowdfunding is a viable option as well, allowing you to collect small investments from many different people at once.
- An IPO. An initial public offering (IPO) is a way to take your company public, but it’s only available to certain types of businesses, and it doesn’t always benefit your company.
Apply for a Small Business Loan With Big Think
If you’re wondering how to finance your small business, or if you’re already in the process of comparing different business funding options, Big Think Capital can help. We offer a range of financial products to small business owners like you—and we’re here to support you every step of the way. Apply for a small business loan today!