Debt or Equity? Check these tips before you raise capital for your business.
Starting a business is no easy feat and neither is growing it. More than five-hundred thousand new businesses are opening their doors every year in America but only about half survive after five years; the second biggest reason is lack of capital. This article is intended to give you insight into the different options you may have when it comes time to raise capital for your business.
Now you are ready and the questions come up... How can I raise money to grow my business? Should I use my savings? Credit Cards? or perhaps seek an investor. Unfortunately, there is no definitive answer as every business and its owner varies. Below we have listed the different types of equity and debt options:
Friends and/or family: Most entrepreneurs turn to family and friends first when they are seeking capital. This can be a great way to finance your business as family and friends are the most flexible when it comes to repayment terms and if you're really lucky you may only have to return the principle that was invested.
Angels and Venture Capital: Angel Investors are accredited and have specified knowledge in a few industries that they invest in. Angles are typically interested in early-stage start-ups that show great potential for massive growth. These investors can also act as a strategic partnership since an angel can offer valuable insight to your business industry opportunities and pitfalls. Venture capital partners seek start-ups and small businesses that are in rapid growth industries such as tech and the medical field or companies that have increased revenue over certain periods of time. VC's seek businesses that can easily raise their evaluation at which they can sell or take the business public in a few years. Many entrepreneurs seek these types of investors because its less risk to them, however, it should be noted that less than 2% of all businesses in America are funded by Venture Capital and Angels.
TruStart Financial is partnered with a direct network of investors and lenders interested in hearing your ideas. Learn More
Business owners who have little to no cash-flow will have a hard time securing financing due to the lack of ability to repay the loan, however, there are alternate ways to fund your business even before you are generating cash-flow. These are the three determining factors when it comes to funding your business through debt, we call them the "3C's":
Credit: A borrower's credit score will almost always be taken into consideration when applying for funding. If your business is generating a strong profit consistently and the balance sheet is positive, your credit score may not have to be as high for approval. Most lenders request a credit score of at least a 650 FICO with minimum derogatory marks such as late payments and collections.
Cash-flow: Businesses that are generating revenue have more options when it comes to funding. Since the vast majority of business lenders are cash-flow centric. If your business generates a profit, obtaining loans such as SBA, business lines of credit, and business term loans become accessible.
Collateral: Loans such as SBA may require collateral be secured by a first position lien in case a borrower defaults. Collateral can be in the form of business or personal assets.
When applying for a business loan take these "3C's" into consideration. If you do not yet demonstrate a healthy profit or have negative reports on your credit, fixing these will help you qualify for more favorable loan terms and save you money by avoiding higher interest payments.