Insights

Funding Your Business 101

SBA loans, personal investors, or crowdfunding? Strategies to get funding for your business.

“It was terrifying to quit my stable job, take out a loan and start my own business,” says Monica LeBlanc, clinical therapist and founder of Cardinal River Counseling. LeBlanc, a newly minted business owner who just moved into her office in Asheville, N.C., joins the ranks of many entrepreneurs who are anxious, alert and optimistic about their business.

Specifically, LeBlanc has joined an arsenal of more than 27 million American entrepreneurs. The 2016 Global Entrepreneurship Monitor defines a growing trend of working Americans considering entrepreneurship as an attractive career option, citing a study that says 51 percent of the working population believes that current conditions are good for starting a business. Small businesses (500 employees or less) account for 99.7 percent of all businesses in the U.S. and add more net jobs than large businesses.

With altruistic ambitions of helping families with loved ones who are battling drug addiction, LeBlanc set out to understand, identify and choose the best financial option available to jumpstart her personal clinic.

What to consider and who to solicit for advice

“The biggest concern for entrepreneurs, undoubtedly, involves cash flow,” says Noah Brockman, a business finance advisor and SME (small to medium-sized enterprise) management consultant for Oregon’s Small Business Development Center. “Before we even get to the thought of expansion or profit margins, we need to first address cash flow and budgets to cover.”

Mapping out a clear cash flow budget that’s updated with goals and projections to raise the bottom line is the type of counsel and resource new business owners need. From there, they will find clarity on which type of funding matches their business.

“It’s really important to help people,” says Wai-Chun Li, senior vice president of the small business lending department at East West Bank. “More importantly, it’s really important to help people the way they need to be helped.”

Whether it’s directing businesses to strive for incremental growth, strengthen their cash flow, or invest in assets, each has unique goals and methods to meet those benchmarks. Profit projections and the estimated rate at which those goals are met also contribute to determining the most appropriate funding options.

Experts in the field such as Brockman and Li who have been working in the funding industry and with small businesses are invaluable resources for new business owners who want to take the first step. “First thing’s first,” says LeBlanc, “I looked for an expert to help guide me in this financial process and found a small business clinic that counseled me step-by-step on the various options available for me.”

Business structures determine funding options

Given that LeBlanc would be operating her own business without much overhead cost or additional employees, she decided to file her business as an incorporated company, or Inc., to separate the legal entity of her business from herself as the founder. “A great first step for business owners is to separate personal and business finances,” says Brockman. “A lot of new entrepreneurs struggle with this concept, since a lot of the money that goes into the business is intertwined with money from personal savings.” When it comes to business structures, about 33 percent of all small businesses surveyed by the National Small Business Association’s 2016 Year-End Economic Report are S-corporations, tied with LLCs, which also account for 33 percent. In contrast, businesses that file as corporations are at 18 percent, sole-proprietorship at 14 percent and partnerships at a mere 3 percent.

LeBlanc considered a few different financing options for her new clinic. “My husband was always there for me, but it was still scary to know that I would be the one responsible for business success,” she recalls. While there are funding options that involve other people who could share ownership responsibility, such as angel investors, venture capitalists and personal investors, LeBlanc did not feel comfortable with the idea of running her business to meet others’ expectations. “I left my stable, comfortable job at a hospital to start my own thing. I want to build up my clinic without the influence of outsiders,” she says. The same thought process was applied toward peer-to-peer lending options like crowdfunding.

Other financing options include having a strategic partner to give advance royalty payments, trade equities, joining an incubator or accelerator, requesting a small business grant, or funding your business through friends, family and yourself. Each option has pros and cons, and the best decision can only be reached with thorough market analysis, business strategy and counsel.

LeBlanc was looking for a lump sum of money that would be delivered quickly and efficiently, without having to compromise autonomous decision-making for her clinic. The idea of a loan was intimidating, but LeBlanc decided to receive free financial counseling and gain a better understanding of how to manage a loan responsibly.

The small business loan of choice

“Most businesses opt for the SBA loan, especially for relatively smaller amounts of money required for things such as maintaining overhead costs, cash upfront for inventory, staying abreast of slow seasons, etc.,” says Li. “Also, it’s much easier to apply for an SBA loan than getting a traditional loan from the bank.” Another advantage includes the swift processing compared to other traditional loans. With all the appropriate paperwork turned in, the turnaround can happen in as fast as two months.

The three things you need to apply for an SBA loan include:

• Business tax return
• Personal tax return
• Personal financial statement

“Unless a business already has big personal or existing equity, it’s hard to have a lot of capital upfront,” says Brockman. “The SBA loan eliminates that pressure and helps businesses move forward.”

Factors to consider

While your business objectives, projections and costs make up a good portion of decision-making, other factors also determine the appeal of funding options. “It comes down to crafting a finance strategy that meets the need of the business owner at the time,” says Brockman.

Analyzing factors such as cash cycle, risk tolerance, industry competition, and customer receptivity and preparing for them will affect business outcome. Online resources such as Bizminer and Mergent Online provide insightful data that can help smaller companies benchmark against industry averages and analyze their rate of financial success. While it may be easier to try and decide on a funding plan without external help, having a finance expert weigh in and ease anxiety can save a lot of time and money in the long run. “Sources of funding can vary by region and locality, and lots of external factors determine what types of funding are available,” says Brockman. “Talk to someone, a small business loan officer or your local bank, to see what’s available.”

More often than not, free seminars and workshops exist in local areas to help business owners learn how to perform tasks such as creating weekly budget updates and identifying the best funding channel to reach business goals.

“More people are interested in being self-employed,” says Li. “It’s very inspiring as a loan officer to see businesses that you have counseled and helped finance grow and prosper along the way.”

Today, LeBlanc’s therapy clinic is up and running in a bright office space on the second floor of a beautiful house. She ended up choosing to take out a $10,000 SBA loan after taking a number of finance courses. Most of that funding is going toward marketing efforts and rent for her office space. “I’m looking to turn a profit and pay my mortgage in the next three months,” says LeBlanc. “But for the next five years, I have a vision to build a supportive community and create a big awareness for those fighting addiction—using my clinic as a foundation.”