There are a lot questions swirling around questions of small business financing and what the best options might be. We had a chance to catch up with the SMB finance team over at ZipBooks, accounting software provider and lender. They make accounting software free and make money on business owners that want to take advantage of optional paid services, like outsourced online bookkeeping.
What are the best reasons for a small business to pursue funding?
The best reason to seek funding is if you won’t make payroll if you don’t. Accounts receivable should be the way to get the cash a business needs to bridge a short-term need. It’s easier to underwrite, you don’t pay interest on the funds until right when you need it and there are never going to be hidden fees that you weren’t expecting.
How can you best determine if you need more capital to fund your business?
It depends on how you are raising the capital. Leverage is risky and equity funding usually isn’t an option for small businesses. In general, a capital investment should only be made if the expected return will be be greater than the cost of borrowing.
You also want to look at your total liabilities and see how much that is weighing down your company compared to other options, like adding owner’s equity (self-funding) or bringing on a business partner. Owning 50% of ten dollars is a lot better than owning 100% of one dollar.
What is the best way to determine when your business will break even and when it will make a profit?
If your current revenue exceeds your expenses, you are breaking even because the earnings that you retain are going up. If cash is going up, your income statement is going to show that you are breaking even.
In order to know if you have a profitable business, is if you have more assets than liabilities.
For example, you could be making more than you spend. However, if the value of the equipment you are making payments on depreciates faster than the loan on the equipment, you could still be in the red. The more complicated the business, the more factors you have to consider before you can show true profitability.
But for most small business owners having a handle on your expenses and accounts receivable are going to be sufficient to show whether you are losing money, breaking even, or profiting.
How can you determine what the risks are in getting funding?
The risks are different depending on the route you take to get funding.
If you get equity funding by selling part of your company to raise money, you will permanently lose any revenue that you might have made from that portion of the company.
If you go with a secured loan, you won’t have to give up any ownership of your company, but you have to give some collateral to take out the loan, which you risk losing if you don’t keep up with the loan payments.
With invoice financing, you get financing based on your accounts receivable. There are other similar options like factoring or invoice discounting. You can get a short-term loan based on the money that other companies have promised to pay you. However, if your customer doesn’t pay the invoice, you will have to pay the loan back yourself.
Rates vary depending on the structure and you will have to run the numbers on whether it makes sense to take out short-term higher interest loans right when you need it or longer term loans that you have to pay interest on the whole time you have the money.
Are there any risks that should make a business owner reconsider getting financing?
Consider the cost of borrowing. In some cases, you may not have a high enough likelihood of success to warrant borrowing. In those cases, you are probably better off bootstrapping your business yourself until you are profitable.
Beginning businesses are always going to have a harder time getting funded because they have less money and less history of success than a well-established company. The longer you wait to secure funding, the more solid your business will be and the better the terms you’ll get from a lending institution.
Are there any reasons why a small business owner shouldn’t seek outside financing?
Friends and family are always going to give you the best rate, so if you have access to this cheap source of capital, I would try there first.
I would also add that any small business that doesn’t have a paying client yet is not ready to see outside financing. Don’t seek funding if you don’t have the track record to get a sustainable repayment rate.
What is your company doing to help small business get started?
ZipBooks wants to turn more small business might-have-beens into small business success stories. We are making it easier than ever for small businesses to process credit cards, send invoices, and get paid, all while helping them save money with affordable prices.
We also take complicated things like accounting and financial management and make them simple, using a helpful interface and even a mobile app. We basically want to make it as easy as possible for small companies to do well financially.