After covering startup costs, many owners struggle to find the working capital they need to go after new opportunities or invest in technologies and improvements that can help their small business grow; it's hard to do without loans and lines of credit. Fortunately, there are lots of ways to access the money you need to grow your business. In this article, you'll learn about some of the options you can use to cover those costs.
How can I raise cash?
There are quite a few sources owners like you can use to cover strategically important costs. These include:
Business checking and savings accounts
Many owners use this pool of cash before tapping into any other cash source. That's because it's the easiest to access and use to cover costs. If you have cash available in either of these kinds of accounts, decide how much you’re willing to part with for your growth strategy.
Do you or your business own stocks, bonds, or mutual funds in a taxable investment account? You might use them in one of these ways to cover your growth-related costs:
Sell them. By selling your securities, you could raise some or all of the cash you need. Keep in mind that sales can result in mutual fund fees, broker commissions, and the realization of capital gains. You may want to speak with an investment professional before moving forward with this option.
Borrow against them. You could also consider a portfolio loan (sometimes called a pledged asset line) to raise the cash you need. Through a portfolio loan, lenders use your investment savings as collateral and allow you to borrow up to 70 percent of the value of your accounts. Because these loans are backed by collateral, they tend to have low interest rates and are relatively easy to qualify for, provided you can meet the funding minimum your lender requires. You can learn more about portfolio loans in this guide:
Before diving into either of these options, talk with an investment manager or a financial planner. These pros can help you ensure you understand the tax consequences you could face by selling your securities, as well as the risks of borrowing against them.
Lines of credit
A line of credit provides access to cash you can borrow and repay according to the terms your lender provides. Many banks will allow you or your business to set up a line of credit to use however you see fit, which can include covering the costs of growing a business.
There is some risk to this option. If you fail to repay the funds you borrow, your personal or business credit score could take a hit, and you might lower your odds of attaining favorable terms on any loans you need to take out in the future.
Have you been contributing to a retirement savings account? You may be able to use those funds to cover some of your business’s strategic expenses. There are a few ways to access the funds in your retirement savings accounts. But it’s important to note that any use of your retirement savings introduces risk, and in some cases, tax concerns.
Want to learn more about using your retirement plan to cover business costs? Check out this guide:
Do you own a home or other properties? You might borrow the difference between what you owe and what the property is worth. Many lenders offer home equity loans with favorable terms and few restrictions on how the funds can be used. The drawback is that these loans require you to put up your house as collateral. This means you could lose your home if you fail to repay the loan.
Be sure to speak with a financial planner before considering a home equity loan to cover your business’s costs.
Cash-out mortgage refinance
You could also refinance a mortgage you have on your home or another property to secure the funds you need. With a cash-out mortgage refinance, you have the option to pocket the difference between what you owe on a property and 80 to 95% of the property’s full appraised value.
Rates and closing costs can be higher with this option than with a traditional refinance, so consider this option carefully before moving forward. As with the other options, be sure to speak with a financial planner before choosing this strategy.
Another option is to take out a second mortgage on a property you own to cover some of your business costs. Second mortgages are structured similarly to a traditional home mortgage with clear repayment terms and interest requirements.
Here's something to keep in mind: It can be tough to find a lender who’s willing to provide this type of financing. Most banks view second mortgages as higher-risk investments of their money, so those that offer them charge higher interest rates than they might for a traditional home mortgage. Again, you should speak with a financial planner before considering a second mortgage.
Many owners apply for term loans to build up their working capital or cover strategic business costs. Term loans, which can be attained through a bank, credit union, or online lender, often have favorable terms and long repayment schedules, but they can be difficult to qualify for, especially for borrowers with less-than-perfect credit.
To learn more about term loans and their qualifications, read this guide:
You can also find tips to improve your business’s credit score here:
SBA loans are one of the most commonly used tools to cover growth costs. Named after the Small Business Administration that guarantees them, these loans help owners to finance a large portion of their startup or ramp-up costs, working capital expenses, equipment needs, and building acquisition or improvement costs.
The SBA offers three kinds of 7(a) loans to owners to cover up to 90 percent of their startup costs, working capital, and equipment needs. They also offer 504 loans to buy existing buildings, pay for land or land improvements, construct new facilities, renovate existing facilities, or buy long-term machinery.
You can learn more about SBA loans and their requirements here:
Many lenders offer asset-backed loans to owners who leverage their business’s assets. Through these loans, you could finance your business’s inventory, machinery, non-mortgaged real estate, or another tangible asset to access fast funding.
Asset-backed loans are often easy to qualify for and attain, even for borrowers with less-than-perfect credit. To learn more about asset-backed financing, check out this guide:
Rather than buying and leveraging the equipment your business needs to improve its operational agility, you may consider leasing large-ticket pieces of equipment. Many equipment wholesalers and distributors offer five-year leases and provide the option for purchasing the equipment at the end of the lease period.
You can learn more about this option in this guide:
If your growing business needs a new storefront or commercial site and you’d rather buy than lease the property, you might consider a commercial mortgage. This form of loan can be used to buy an owner-occupied office building, retail center, warehouse, or other commercial property.
Commercial mortgages differ from home mortgages in both terms and the amortization period. Commercial mortgage terms often range from five to twenty years, and the amortization period extends past the term of the loan. Loans structured this way usually require a borrower to make equal monthly payments for the life of the loan and a final balloon payment.
These loans may require higher down payments than SBA-backed options, and they can be slightly more difficult to attain. Many lenders also require borrowers to guarantee the loan, especially if the borrower has no borrowing history.
Learn more about commercial mortgages here:
Commercial bridge loan
Some owners use bridge loans to cover their commercial real estate costs and other high-ticket items, including large batches of inventory, renovations, or repairs. These loans can often be attained quickly and relatively easily, even for borrowers who have less-than-perfect credit. Bridge loans are collateralized, so lenders tend to worry less about a borrower’s credit history and credit score, though most will still require a credit check for loan approval.
To learn more about this option, read this guide:
Commercial hard money loan
Some non-bank lenders offer commercial hard money loans that are secured by the borrower’s property. This short-term option might allow you to buy a business property quickly, with flexible terms, and often without checks to your credit history. However, the interest rate on these loans is usually high, so many borrowers view these loans as a last-resort option and refinance the loan into a mortgage at a later date.
Some online lenders offer hard money loans, but most owners turn to friends, family members, or local real estate investors to secure this form of funding. Be sure to study the terms of a commercial hard money loan carefully before proceeding with this option.
To learn more about this option and other commercial real estate loans, check out this resource:
If you find you can’t raise enough cash through other means or you aren’t comfortable tapping into your savings or equity, think about bringing on a partner who can help you boost your working capital and cover your strategic growth costs.
Similar to the options above, there are risks and benefits to partnerships you should consider carefully. Want more information about forming a partnership? Check out this guide:
You might reach out to venture capitalists or angel investors to attain the money you need. Some invest in the early stages of a promising startup, but many prefer to see a proven concept before providing the capital its owners need to succeed.
To learn more about venture capital and angel investors, check out these guides:
How should I proceed?
You can connect with an outsourced CFO who can help you weigh your options and proceed with the choices that make the most sense for your goals. An outsourced CFO can pour through your financials, build projections, study interest rates, and help you work through other factors so you can position your business for long-term financial success.
Would you like to connect with an outsourced CFO? Take a look at a few of our favorite firms:
While financing is important, there are many other factors to consider when pursuing growth strategies for your business. Log into your owner’s portal for articles and advice that can help you with every action you need to take.