I had the opportunity to interview Charles H. Green, Managing Director of the Small Business Finance Institute on funding strategies for small business.
Here’s what he shared.
Q. Crowd funding and business competitions have become extremely popular as non traditional ways to fund a business. In your opinion what’s the best way for a new business to fund their business in today’s climate? Existing business?
A. Funding for startup companies remains a serious challenge, and much of that difficulty comes from entrepreneurs planning the design of their business card ahead of figuring out the financial plan. It’s tough, but the difficult decisions need to be made up front as to how to lower the amount of money needed (“bootstrapping”) and get the business launched and into revenue ASAP. The three “Fs” maybe best source for the funds you absolutely must have: family, friends, and fools.
Crowdfunding might help, but since that’s based on a “community,” you’ll get much better reception once you have some paying customers and your fans see that you can make this work.
Existing business? That area of funding is growing significantly over the past couple of years, with “innovative” lenders arising through technology platforms to qualify and fund businesses over the internet. I’m referring to companies like OnDeck Capital, IOU Central, etc. The SBA has also liberalized some credit standards for smaller loans (<$350k) and provided technology for lenders to scale these applications and manage them more efficiently. These factors combine to encourage more lenders to offer these loans.
Q. Outside of these two, what are some creative financing options for existing businesses?
Get financing from:
- Your clients (through prepaid invoices)
- You vendors/suppliers (through 30-60 day terms to pay)
- Your staff (through commission-only compensation plans)
- People who will work for free or almost free (through use of interns, when you can)
Q. What’s your opinion on financing with credit?
A. Credit is often the only funding available, since most non-business people are adverse to the risk of investing, and most professional investors demand very steep financial returns that are out of proportion to the realistic scale of most small companies.
Q. What’s the biggest challenge new and existing businesses face when looking for loans and investors?
A.Too many business owners don’t really have a grasp of their own financial metrics or projections. Thoughtful preparation of meaningful numbers (financial statements) should be job #1 when starting a business, and performed regularly once the business is open. Otherwise, the owner is wandering in the dark.
Q. What mistakes do entrepreneurs and business owners make when it comes to seeking funding for their business?
A.
- Asking for more than they need (or less than they realize they need);
- Not knowing the difference in #1;
- Not doing the homework to understand the correct structure or type of financing they need, and who provides it;
- Poor communication skills to make their case—why, how much, and how/when I can really pay it back.
Q. A few business owners I’ve spoken with have felt that the interest rates for funding are too steep, what should a business owner expect in this area?
A. Bank financing has been stuck in the lowest interest pricing in a generation, since 2008; but many of the non-bank lenders emerging in the innovative sector have very aggressive pricing, that comparatively, can be in the 70-90-100%+ range. First job is to get to know how to figure out the real price calculations of funding; second, shop around. For any business, pricing should be based on the risk of loss that the lender is exposed to.
Q. Share any additional thoughts you would like to share with small business owners and entrepreneurs when it comes to business finances and funding.
A. I have a lot to say, actually, that can coach business owners about getting small company financing, and it’s all in my books:
“The SBA Loan Book,” (Adams Media, 2011)
“Get Financing Now,” (McGraw-Hill, 2012)
“Bankers Guide to New Small Business Finance,” (John Wiley & Sons, 2014).
Thanks so much to Charles Green for a very insightful interview.
Biz Practitioner
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