Want to expand your business? Growth depends on selecting the best sources of capital for your company. Since all sources of capital are not alike, how you choose to secure funding will help determine your company’s cash flow, risk, valuation, acquisitions, and future financing.
A strong performance record may not be enough to fund your vision if you don’t have sufficient capital. A capital plan, carefully tuned to your company and industry, is vital to finding and securing the sources of capital your business needs.
Do I need a capital plan?
Companies often lack adequate financial planning built around a solid capital plan. Yet most businesses rely on multiple sources of capital in order to balance debt, reduce risk, and fund new opportunities.
As you build your plan and raise funds, take time to evaluate all your capital options—both traditional and unconventional. Start by reviewing your existing credit sources, such as bank loans and retained earnings. Consider how you can use capital from these resources to grow your business.
Then, consult your advisors on ways to secure funding from other sources of capital that suit your business needs. Your options may surprise you.
What are some common sources of capital?
As businesses expand into new markets—or invest in themselves—they often rely on multiple sources of capital to stay ahead of the competition. Here are some common examples of where that funding comes from:
Conventional business loans
Bank loans are a common source of funds for businesses. A loan or line of credit from a lender offers standard terms to fund business growth. You can use a line of credit to meet your company’s short-term cash needs. Term loans often include credit specifications with owner guarantees and routine financial reporting requirements, but they’re still an important factor in driving down capital costs.
Personally secured credit
If your business is still in an early stage and unable to secure a conventional loan, a personally secured business credit card or line of credit may be able to offer a solution. With the right card, you can set spending limits and mitigate fraud while enhancing your working capital. Business credit cards provide quick access to funding when you need it, but at much higher interest rates than other sources of capital. You’ll want to pay them back as soon as possible to keep costs low.
Leasing equipment offers lower payments and can help your company avoid the short-term cash flow shock of a major purchase. Leasing can also offer tax benefits, and because it represents a business expense instead of long-term debt, leasing can make your balance sheet a little more attractive. Just remember that built-in financing costs could make leasing more expensive than an outright purchase or borrowing money.
If you’re not able to access traditional financing or need more funding than your loan stipulates, equity investors will provide you with capital in exchange for a share of your company’s ownership. Equity funding or equity financing can sometimes be referred to as equity crowdfundingDisclosure 1, a concept that is familiar to many small businesses and startups. Investors might be individuals or professional private equity firms that target businesses in need of growth capital. Partners usually expect a greater share of your profits and want to be involved in day-to-day operations, so anticipate a significant decline in your control and returns.
Mergers and acquisitions (M&A)
If you want to expand rapidly, consider M&A. Combining a complementary business with your own can provide additional capital and management expertise while eliminating overlap in product offerings, operations, distribution, and infrastructure. M&A can also provide a solution for ongoing labor shortages, an answer to supply chain disruption, and even an option for transition planning. When acquiring or merging with a targeted company, be sure to take full advantage of its potential funding sources. Successful M&A requires strategy, effective deal selection, efficient merger execution, and support from industry and corporate finance specialists with relevant experience.
Small Business Administration (SBA) loans
If you’re expanding and need more flexibility than conventional financing provides, your small business may qualify for one of three different types of SBA loans. These government-backed loans are offered through the SBA and distributed by banks, with the SBA assuming most of the risk. Compared to conventional loans, SBA loans offer competitive terms, counseling and education, and other unique benefits. They also offer freedom in how you choose to use funding, such as acquiring real estate, funding innovation, or buying out a retiring partner. SBA loans require thorough documentation, so you’ll want to speak with an experienced banker—like your Truist relationship manager—who can help you with your application.
Personal loans and alternative capital sources
There may come a time when you look to personal savings, family and friends, or angel investorsDisclosure 2 as potential sources of capital. While they might offer more favorable terms than professional sources, these transactions can offer a different set of challenges by mixing business and personal relationships. Traditional crowdsourcing, such as a Kickstarter campaign, is another option, but be sure to research the regulations and understand how it may limit other fundraising methods.
Vendor credit is a small line of credit that allows you to buy goods or services now and pay for them at a later date (typically within 30, 60, or 90 days). It can also be a form of credit that your vendors give as payment for an amount they owe to your business. Working with your suppliers to obtain favorable payment terms, discounts, and financing provides a quick way to access inexpensive working capital, but its use can be limited by the scale of your supplier’s credit and usual terms of the industry.
Selling your receivables to a commercial finance company at a discount can provide your company with cash and reduce your collection risk. Receivables factoringDisclosure 3 can be expensive compared to other forms of capital and is typically only practical for businesses with creditworthy customers.
Public programs or grants
State and local governments offer lending programs or outright grants, which don’t have to be repaid, for specific business purposes and projects, like airport concessions, arts facilities, and opening businesses or branches in specific cities or states. The U.S. Chamber of Commerce maintains a list of these programs.Disclosure 4
Overseas investors, sometimes called foreign investors, are individuals or, more commonly, companies that are interested in expanding their reach by investing in or buying ownership stakes in other countries. These investments can take several different forms, and they often require business owners to defer to their overseas investors on business decisions.
Corporate venture capitalists
When an established corporation decides to invest corporate funds in an external business, whether a startup or an established business, it’s known as corporate venture capital. These investments might be strategic, in that they help the corporate investor to bolster its position in the market, or they might be strictly financial, designed to generate a return on investment for the corporation.
Private investment, often through a private investment fund, a venture capital company, or a risk capital company, is always an option for capital funding, as is direct investment from individuals or angel investors. Whichever form of private investment you choose, make sure you understand the investment amount, the length of the investment, the level of contribution and involvement, and the legal implications for your business.