Most small business owners are constantly looking for ways to improve their business and grow their sales. At some point, this will likely require additional funding to cover expenses and accelerate growth. This is often more challenging than expected thanks to the numerous roadblocks that can emerge on the road to additional capital.
In our 2021 State of Small Business Survey, we found that only 49% of those that applied for relief funding were actually approved. Of the 51% that were rejected or received no communication these were the primary reasons why:
- Their business had only been operating for a short time
- Poor personal or business credit history
- Missing loan documents
- Lack of thorough financial documentation
And while these results were specific to PPP and SBA Loans, which technically should be easier to qualify for, these same issues are prevalent in the pursuit of any type of funding. So, how do you prepare to pitch your business, apply for loans or develop alternative funding options? Start with a growth plan.
Develop a strategic growth plan— using your business plan
The first step is to make sure you have put together a strategic growth plan. Basically, this is just a business plan but focused on the strategies you need to implement and milestones you need to hit in order to grow your business.
Focus on your financial forecasts
The most vital piece in this plan is a financial forecast. This will ensure that you understand how much money you actually need to fund your growth, based on your projections. It will also help you showcase how you intend to use the funding once it’s been acquired.
Having even a rough distribution of funds (ie. which expense categories and when it will be used) can go a long way in convincing investors and lenders of the viability of your plan. This obviously has the potential to change once you actually receive the money and start using it. However, thinking through the usage and planning ahead can help you better manage the money and optimize your investment.
Your growth plan is actually a growth tool
When your plan is finished, you will not only have a great tool for managing your company, but also for getting the funding you need to grow your business. Whether you’re running a small home-based business or a large biotechnology company, you’re going to need to present a professional, well-organized plan with realistic financials.
If you’re using LivePlan, you can feel confident that you’re on track to put together an investor-ready and loan-ready business plan. Our customers have secured hundreds of millions of dollars in investment capital and small business loans over the years—and we want to help you secure the funding you need to grow your business.
Key methods for funding your business
Once you have your plan in place, you need to identify which funding method(s) you intend to explore. Much of your decision depends on how much funding you need, the level of risk you’re willing to take, and how accessible specific funding options are for your business.
More than likely, you’ll be leveraging multiple funding methods to increase cash flow and boost growth. Here are a few common options worth exploring.
To bootstrap your business simply means you finance your business with your own funds, through your own savings, personal loans, SBA-backed loans, or credit lines, or with credit cards. Read on for more about loans in the next sections.
When you bootstrap, you’re not giving up any ownership or equity in your company, the way you would if you took angel investment or venture capital.
Bootstrapping also means that you will need to start producing revenue for your business as quickly as possible to continue to fund the business on your own.
The benefit of bootstrapping is that you retain complete control and ownership over your business. Often this looks like moonlighting and working on your idea on the side while still holding down a regular job. Palo Alto Software was actually bootstrapped by our founder, Tim Berry.
2. Bank loans
A bank loan provides medium or long-term finance. The bank sets the fixed period over which the loan is provided (ex: 3, 5, or 10 years), the rate of interest, and the timing and amount of repayments. Typically, it’s wise to work with a credit union or other local bank so that you can work with someone directly on your loan application.
In addition to your business plan, the bank will require that you provide some security (“collateral) for the loan. However, in the case of a startup, this security often comes in the form of personal guarantees provided by the entrepreneur.
3. SBA-backed loans (U.S.)
The Small Business Association in the U.S. offers a few different loan programs through participating banks across the country. These programs are designed specifically for small businesses and are typically leak risky and more accessible. The SBA itself doesn’t actually do the lending—you’ll still need to strike up a relationship with a loan officer at your local bank, credit union, or nonprofit financial intermediary to access the programs.
If you are looking to get an SBA-backed loan, you should think about working with your local SBDC (Small Business Development Center) office. SBDCs receive state and federal funding to help you for free. To take advantage of their expertise, find your closest SBDC office here, and check out Bplans’ guide to small business loans.
4. Friends and family financing
Friends and family financing is when you receive funding from members of your family or your social network. The money can be in the form of a loan, or in exchange for equity.
But, keep in mind — taking money from friends and family can be tricky and emotional.
Providing your family with your strategic growth plan—your business plan—so that they can see that you are being thoughtful about your growth can be a great first step. We highly recommend you seek legal advice to help you and your family or friends set up your business arrangement for success from the outset. There is nothing worse than family and friends fighting regarding money and business.
Crowdfunding is when you ask a crowd of people to donate a defined amount of money for a specific cause or project in exchange for various rewards. The three general categories crowdfunding can fall under are equity, donation, and debt.
Keep in mind that every crowdfunding site differs and has different requirements to raise and acquire funding. So, be sure to review your options carefully and read the fine print before going all-in on a single platform.
6. Angel investors
Angel investors are affluent individuals who provide capital for companies (typically startups), usually in exchange for convertible debt (where the intention is to turn that debt into equity at a later date) or ownership equity (a residual claim on ownership assets). They will typically invest under $2M, but more commonly between $50K to $250K.
If you do not have an exit strategy for your business, angel investors may not be your best route. These investors are looking for companies that they can invest in, as a way to get a return on their investment.
If your plan is to grow your business and sell it, acquire more businesses, or even potentially go really big and IPO, then angel investors might be right for you. But if your plan is to grow your business, own it, and run it forever, you may want to think twice about approaching angel investors.
7. Venture capitalists
A venture capitalist (also known as a VC) are people who invest in business ventures by providing capital for either startup or expansion. VCs are looking for a higher rate of return than would be given by more traditional investments. Typically, the range of funds invested by VCs and VC firms is $500,000 to $10 million. You need to be planning a very high growth strategy in order to even think about bringing in VCs.
Pursue funding that works for your business and growth strategy
Whatever funding source, or combination of sources you decide to seek, we wish you the best of luck in your new or expanding venture. Just remember to seek out funding that works for your business and to prepare your growth plan and pitch materials around that option. If you’re looking for additional funding alternatives, check out this article on the top forty ways to fund your business.
Editor’s note: This article was originally published in 2012 and updated for 2021.