What is Small Business Funding?
Simply put, small business funding is any source of capital that supports the operations and growth of an organization with 2-99 employees. Well, that’s our definition at least. The source of this money can come from a wide range of sources -friends and family, customers (when they pay you), angel investors, a bank, venture capitalists. oh, and we’ve been known to give small businesses money too! Aside from getting money by actually selling your product or service to customers, The only way to get funding is by giving up something on behalf of your company. This is either done by selling shares of ownership and control in your company (as is the case with venture capital and angel investors) or by making a commitment that indebts your company to the provider of capital (as is the case with bank debt, account receivable factoring, equipment loans).
Things to look out for when seeking funding
Aside from those generous Nigerian princes offering you free money via email, there is no such thing as free money (note, those Nigerian princes are not real…). This is super, super important to understand. The money is not free! If someone is giving your small business money, they expect you to give them their money back plus some more money, after all it’s only fair that you compensate them for taking the risk that you don’t repay their money. So when you agree to take money from an investor or lender, watch out for what you promise to give them in return.
In the case of debt, where you commit to repay someone a specific amount of dollars in set period of time, there are a couple things to watch out for. First, how much are you committing to pay? If they’re giving you $100,000, how much do you need to pay them back? $110,000? $150,000? $300,000? It isn’t always obvious. You may only need to pay back a low monthly payment, but you could be committing to a hefty “balloon” payment at the end of the loan. If at any point you fail to make a payment, you are defaulting on your loan commitment and the lender would be entitled to collect the full amount you owe at the time (even if that means assuming control of your business and assets). Know what the payments will be in advance and do the calculations to be sure you will have the cash available when required. Also, what is the term you’re committing to? 6 months? 2 years? 10 years? the idea of not paying someone back for 2 or 3 years may sound swell, but you should probably expect to pay a higher interest rate over that time (the longer the amount of time you get before giving their money back, the greater the risk that you don’t repay at all). Third, watch out for negative covenants and financial covenants. These are terms that limit your flexibility as a business owner from making any decisions that would increase the risk that you dont pay the lender back. Lastly, if you’re looking to pay an affordable interest rate on the money you borrow, the bank may require a personal guarantee which puts you in an especially risky position in the event the business takes a turn for the worse – even if that seems unlikely at the moment.
In the case of selling equity (or ownership in your company), you need to recognize that the investor who know owns a share of your business gets certain rights related to that ownership – much in the same way that you as a business owner have rights. First, watch if they’re asking you to commit to a specific return – sometimes equity investors will ask for a preferred return where you promise to give them 1 or 2 times their money (ie if they invested $100k, you have to return $200k to them before you can take any money out for yourself). Also watch out for control provisions – these can include a board seat, which requires you as the entrepreneur to get approval from the board (including your investor) before making significant business decisions; veto rights in the event of an acquisition opportunity, potentially preventing you from selling your company at a price you think is fair; and could even go so far as to give the investor the right to fire you, the CEO, and replace you with a “more competent” manager (in their opinion, of course).
How Lighter Capital and Revenue Loans are better for entrepreneurs
If the list of things to watch out for when raising debt or selling equity had you a little panicked, we’re here to help. With RevenueLoans, we’ve tried to combine the best features of debt and equity funding to make life better for you, the entrepreneur. How do we do this? By tying the loan repayment your company’s revenues, as long as you continue to stay in business and pay the low percentage of the revenues you make each month it’s unlikely you can find yourself in a position of default. Additionally, we have no ownership of your company and thus make no control provisions regarding how you can or can’t run your business. Finally, we don’t require any personal guarantee, which keeps your company’s loan commitment where it belongs – limited to the success of the business and your ability to maintain and grow revenues.
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