How to Get Funding for a Business

Securing additional funding is something that every business owner should consider at least once during the tenure of their organization. 

For some, that funding could be to get that brilliant idea off the ground. Others, it may be ready to grow and therefore need additional financial support. Business owners need to know what available capital options exist and how to pick the right one for their business.

 We answer four common questions about how to fund your business, regardless of its stage. 

1) What is business capital?

Business capital, generally, is the money used to build, run and grow a business. It’s important to note that business working capital (aka working capital), though it may sound similar, is a financial measure of the difference between current assets (what you own) and liabilities (what you owe). On a basic level, working capital is the cash available after any business debt is paid.

2) How can I raise capital for my business?

Itamar Chalif, VP, Business Banking Officer at Rockland Trust, shared the two broad categories of funding to consider when a business needs to raise capital: debt funding and equity funding.

Debt funding, like a traditional bank loan, is when a business borrows money that is repaid over a set period with interest.

Banks like Rockland Trust offer a variety of solutions that all fall under this umbrella, including: 

• Bank loans – a business requests a specific amount of money and agrees to pay it back over time with interest.
• Bank line of credit – businesses have access to a set amount of money and only pay interest on the amount of money drawn from the line of credit.
• Business credit cards – similar to a personal credit card, business credit cards allow businesses to finance purchases with a short delay between when the purchase is made and when cash comes out of the business checking account. If the balance is not paid in full, interest or other fees may be added to the bill.
• SBA funding(Opens in a new Window)- The U.S. Small Business Administration (SBA) offers several programs to support small businesses with access to funding options such as SBA-guaranteed loans. As a Preferred Lender of the SBA, Rockland Trust can work with you to discuss the SBA program that best suits your business's needs and growth plans.

Equity funding, on the other hand, typically results in an investor having a stake in your business. A common example of equity funding is when publicly traded organizations sell stocks to fund capital needs.

If he could only impart one piece of advice about funding a business, Itamar wants business owners to know that “the most important thing in business is liquidity – and it should remain front and center in your mind as you consider options for business capital.”

Liquidity doesn’t necessarily mean having cash on hand but having access to money should your business need it. One option is to secure a line of credit you can draw on as needed.

3) What challenges might a business owner encounter when it comes to funding? 

There are benefits and drawbacks for every source of funding. Think carefully about how each type of funding aligns with your business goals and plans.

If a business needs new equipment, for example, there are a few options for financing that could be considered:

• Purchasing it outright with cash may seem quick and easy, but it’s important to think through the business's liquidity needs in the near term to avoid a cash flow disruption.
• Putting the equipment on a credit card can be tempting if the business is sure it can pay it off in full before interest kicks in.

Additionally, because the cost of borrowing money is subject to interest rate increases, business owners may need to consider rate fluctuations in their forecasting to determine how much capital they need and how changing interest rates may impact their bottom line. 

4) How will I decide which type of funding is best?

Business finances depend on several factors that make it nearly impossible to give one-size-fits-all advice. In a broad sweep:

• Loans are intended for a specific purpose and tend to be leveraged for larger purchases, such as real estate or equipment purchases.
• Lines of credit are used to help augment short-term cash flow needs, such as buying equipment or leasehold improvements
• Credit cards are good in a pinch but tend to carry a higher interest rate and typically aren’t the best bet for long-term or large expenses.

Itamar suggests that business owners consider how one funding source may impact the business down the line, such as during times of low cash flow.

Though the specifics vary, business owners should refer back to their business plan. Every business should have a business plan that is revisited at least once a year to ensure your business is on the right track.

The Abridged Guide to Writing a Business Plan

You don’t need to decide alone. Get in touch with a business banker.

Regardless of whether you pursue debt or equity funding for your business, it’s essential to have a trusted team of advisors on your side to help you consider your various options for funding and how your cash flow and liquidity might impact your short- and long-term business plans.