As a business coaching firm, one of the questions we’re most often asked is, “What is the best way to finance the growth of a business?” The answer to that question often varies based on the size of the business and its stage of development, but here are five common ways to finance growth.
- Private investors. If you’re willing to give up equity in your business, accredited and sophisticated investors may be a source of funding for your company. You will have the highest probability of receiving funding if you have a scalable business model that you have implemented successfully on a small scale, an experienced management team, and attractive financials. When approaching investors, it is important that you properly value your business, be willing to give up a reasonable amount of equity based on the amount of money you are seeking and the current profits of the business. It is also important that you have a clear exit strategy for your investors.
- Business loans. For established businesses, bank loans may be another option for financing growth. To increase your odds of receiving funding, pull together a comprehensive loan package which demonstrates the business’s ability to repay the loan. Your loan package should include a business plan, financial statements for the last two to five years, any collateral you plan to pledge, and a demonstration of your credibility to successfully operate the business in the face of various economic factors and competition.
- Business credit and trade lines of credit. In business, just like in life, it is a good idea to establish credit early and to develop a track record of responsible and predictable financial behavior. One of the first steps to building business credit is opening one or more business checking accounts. You want to be mindful to keep an adequate cash reserve in your accounts. Some credit scoring systems factor in your bank rating which takes into account your average bank balance when calculating your score.
You also want to make sure that you have a D-U-N-S number from Dun & Bradstreet (D&B), which you can apply for at dnb.com. After obtaining your D-U-N-S number, you should establish trade lines of credit with office supply stores, shipping companies, and any vendors that you use regularly or make large purchases from that report to D&B.
You can also establish credit and boost your credit rating by borrowing against Certificates of Deposit (CDs) or other assets that you hold in your bank and by repaying the funds borrowed.
Lastly, if you are a new or small business, it’s important to have an official business address, because if you list your home or a P.O. box as your business address on business credit applications, it can hurt your score.
- Grants. Government and foundation grants can be another option for some businesses. While there are many grant opportunities that are designated specifically for 501(c)(3) non-profit organizations, there are a number of grant opportunities that are open to individuals and corporations. Additionally, for those opportunities that are designated solely for 501(c)(3) nonprofit organizations, there may be opportunities for you to benefit by partnering with those nonprofits to develop and implement programs. To learn more about government grant opportunities that may be available for your company, you can visit Grants.gov. To research foundation grant opportunities that may also be available, you can check out Foundation Center or Grant Station.
- Crowdfunding and microloan sites. For people looking to raise smaller amounts of money or for those who have large followings, microloan and crowdfunding sites may be a good option. Microloan sites allow you to borrow from a pool of people that you repay at a certain interest rate based on your credit rating. Crowdfunding sites allow people to contribute to your fundraising campaign, often times in exchange for benefits or perks. These perks can include anything from t-shirts and early access to products, to credits in a video production or movie.
To be successful, crowdfunding campaigns require a great deal of thought, work, and promotion. Social proof plays a big part in the success of crowdfunding campaigns. Therefore, it’s generally best to do a soft launch to gain financial support from your close supporters before a big public launch. People are generally more likely to fund things that already have support. If you do an Internet search for “microloan sites” and “crowdfunding sites,” you’ll find quite a few to choose from. Be sure to closely read their terms and conditions in order to find the site that is the best fit for your business and campaign.
In closing, here are two great pieces of insider advice. First, it is a good idea to line up additional funding before you need it. If you wait until you need it, you will often find funding difficult to obtain or it will be on disadvantageous terms. The second piece of advice: engage the services of a knowledgeable business coach or fundraising professional who is familiar with the specific type of funding you wish to obtain; it will save you time and yield better results. Remember, access to capital and cash flow are the lifeblood of your business, so it’s important to have a sound plan for increasing both in order to efficiently achieve your business goals.
The opinions expressed here by Inc.com columnists are their own, not those of Inc.com or Visa.