Access to startup or growth capital is an enduring challenge for many small to medium-size businesses (SMBs). The capital markets have been slow to heal from the financial crisis, and bank lending has not returned to pre-recession levels.
The deep gap in financing spawned alternative and online lending, which have experienced solid growth over the past five years. Online lending and equity and debt-based crowdfunding are now mainstream with many more SMBs becoming attracted to these platforms.
Sustained economic growth will provide business owners with the confidence they need to take risks and repay investors to expand their firms. A growing economy will also produce more “quality” businesses making them more viable candidates for bank lending.
This brings me to the first key to successfully raising capital in 2018.
Banks of all sizes are under far-reaching government regulations (Dodd-Frank) as a result of the financial crises. While regulatory relief may be on the way, government red tape continues to inhibit lending. That means only the strongest businesses–those with collateral, capital and a solid financial track record—generally qualify for a loan. Banks, on average, only approve 25 percent of SMB loans.
That means business owners have to be realistic about approaching banks for a loan. They have to demonstrate supreme “readiness.”
If you know you have fallen short in the financial management area, it’s never too late to improve, strengthen, or better organize your financial condition. Start by developing a profit and loss statement, getting a true handle on your cash flow, and better managing (or mastering) the art of budgeting, basic accounting, payroll, tax changes for 2018, and revenue forecasting. Of course, technology makes all of this so much easier for today’s business owners.
The Small Business Association (SBA) has a self-paced online course, Financing Options for Small Businesses, which covers the host of issues and options for business financing. The bottom line: Your SMB needs to be poised to take advantage of the growing economy. Embed best practices now so you can better track performance and get the financing you need quickly when the opportunity arises.
There are many resources you can turn to for lending options. I like the Best Small Business Loans of 2018 list from US News, which includes online lenders that have more flexibility than banks in terms of funding new businesses, invoice financing, credit scores, and more. For loans under $350k, here is a list of the best SBA loan providers.
The concepts of readiness and realism apply when seeking online lending. Business owners especially have to be realistic about the cost of capital, given the speed and flexibility at which it is being deployed. Business owners must educate themselves about the terms of borrowing. Thankfully, many online lenders are very transparent in providing this information.
Equity crowdfunding is beginning to take off—especially “Title III” or Regulated Crowdfunding, which allows ordinary Americans to invest in startups and businesses on regulated platforms. It took four long years for regulators to write the rules on this type of crowdfunding, so it has only just started. As of March 2018, 834 SMBs have raised more than $111 million dollars, averaging $376,584 per SMB. More than 112,000 individuals have invested in these businesses, which come from a range of industries including technology, restaurants, entertainment, personnel services, beverages, and more.
In my opinion, equity crowdfunding is poised for explosive growth. But entrepreneurs must understand that raising capital via online crowdfunding is not easy. To be successful, entrepreneurs must showcase their businesses online just like live presenters do on Shark Tank. Entrepreneurs must also be prepared to comply with government regulations. You may want to visit the most active crowdfunding platforms—Wefunder, SeedInvest or Start Engine—to learn more, or see how successful entrepreneurs have raised capital.
For mature, profitable companies looking for investment capital, check out a Small Business Investment Company (SBIC) licensed by the SBA. Each SBIC is privately-owned and invests in small to mid-size businesses in the form of debt or equity.
There is good news from Capitol Hill on bipartisan efforts to free up needed capital. The House and Senate have each passed bills that will provide regulatory relief to small and mid-size banks, which should improve small business lending. My organization is also supporting about a dozen bipartisan bills (most passed the House with unanimous support) that will improve the capital markets and make it less costly and complicated for SMBs to raise money from investors.
The policy piece is key as the track of legislation and Administration-led initiatives impact economic performance, which impacts business confidence, the strength of investment and consumer sentiment. All of these impact the health of SMBs.
Our economy appears to be on track. Make sure your business is organized and ready to take advantage of growth opportunities, which may require growth capital to leverage those opportunities.