By Mahima Chawla, Business Development Manager at Bond Street.
Before you take a step down any financing road, whether it be debt or equity, there are several initial considerations. Is now the right time for me to raise external financing? What type of debt or what type of equity is best for my business?
Download the free and complete Small Business Owner’s Guide To Financing to help you in answering these questions.
Whether or not it’s time to raise financing for your business comes down to evaluating the return on investment, or ROI. If you deploy the funds you raise toward an expense that will generate growth or revenue, the investment has a positive ROI. Whether you’re asking for investments from family and friends or applying for a small business loan, you should have a clear idea of exactly how the expenditure of that capital will grow your business.
Expenditures you can expect a positive ROI from include hiring employees, opening new retail or office space, buying important equipment or inventory, refinancing debt, and smoothing out short-term fluctuations in cash flow. Once you have confirmed that the business activity has a positive ROI, the next step is to determine whether equity or debt is the most suitable option for you.
Equity Financing 101
Equity financing involves raising money from a 3rd-party investor in exchange for a percentage of your business.
- Companies can raise equity at an early stage without much operating history or profitability.
- Given that there are no immediate payments on the equity raised, the business does not need to maintain a steady or sufficient cash flow. This frees business owners to focus on longer-term strategies that may only generate income down the line.
- Business owner gives up portion of future profits and the amount ultimately repaid is unknown.
- Decision-making power is diluted between business owner and investors.
- Process of raising equity can be time-consuming and challenging.
What type of equity is right for my business?
Equity is a suitable option for a business at a very early stage all the way through to a late-stage company. Friends and family are often the first source of capital. Once a startup is up and running, perhaps before it is profitable, individual angel investors and venture capitalists can fund the next stage of growth. Finally, profitable businesses with some years of operating history can turn to private equity for growth capital.
Debt Financing 101
Debt financing, which includes small business loans, means borrowing money from a lender to pay back in the future.
- Clearly specified repayment plan and fixed repayment.
- Maintain full ownership over your company in terms of future profits and decision making power.
- Business needs to maintain a steady and sufficient cash flow to avoid defaulting on payments.
- Lenders often require operating history and profitability of the company so debt is not appropriate for pre-launch or pre-revenue businesses.
What type of debt is right for my business?
There are a variety of types of debt, which serve different use cases. Debt with lower interest rates is often asset-backed, which means that the business puts up assets, like equipment or invoice receivables, as collateral. Unsecured debt, such as many credit cards, are more expensive but do not require collateral. Common types of debt are lines of credit, small business credit cards, merchant cash advance (MCA), invoice financing, and term loans.
A term loan is a fixed amount of capital repaid over a set time period and geared towards longer-term growth investment such as hiring employees, purchasing inventory/equipment, opening a new office/retail space, or refinancing credit card debt.
Traditionally, small businesses looking for term loans go to banks but the application process is manual and time-consuming and they are rejected 80% of the time since banks do not have the technology and infrastructure to assess small business risk. These businesses are often left taking out high interest rate loans with alternative lenders such as MCAs. Bond Street is an online lender bridging the gap between banks and alternative lenders by providing fast and affordable capital. Loans are for $50K-$500K over 1-3 year terms and interest rates start at 6%.
Congratulations on becoming an expert on the basics of small business financing! You are well on your way toward responsible business growth. Before raising financing, answer the original questions of whether your investment will have a positive return, and, if so, what type of equity or debt is most suitable. Want a more in-depth treatise of these topics? Refer to our free Small Business Owner’s Guide to Financing as a resource.
Mahima Chawla is a Business Development Manager at Bond Street, an online lender for small businesses offering loans of $50K-$500K, with interest rates starting at 6%, to help you invest in your growth.
Bookly has partnered with Bond Street to offer all members 33% off the loan origination fee—to schedule a free consultation email email@example.com or apply directly here.