A common concern I often hear from business owners and startup entrepreneurs is where the money will come from to fund future growth. For some, that might require outside investors, which in turn can mean giving up partial ownership or control.
But most businesses can grow successfully by using one or a combination of other financing approaches that don’t require major commitments or outside investors.
It starts with understanding the different options, and that alone can be challenging. For example, an American Express survey found that 34 percent of business owners believe – incorrectly – that a business “term loan” (funded immediately for a set term and amount) and a “line of credit” (which you open and tap as needed) are essentially the same. And nearly 40 percent believe it’s a good idea to apply to as many lenders as possible when seeking a loan, when the opposite is true. (Multiple applications can harm your credit rating.)
Here are ways to position your business for all the future funding you’ll need:
• Reinvest your profits. The best source of “venture capital” for an existing business is money you’re already generating. This is “patient” capital that builds value in your business without debt and without giving up shares to others.
Many entrepreneurs miss growth opportunities by spending profits in unproductive ways. Others take the opposite extreme, pumping every penny into the business while taking nothing for themselves.
• Tap into trade credit. “Trade credit” is a way to put off payment for goods and services your business purchases from suppliers and vendors. You may find vendors more than willing to sell on credit to a growing business – and even to a startup – if you can strike a long-term deal to buy from them.
And from your perspective, trade credit is also one of the safest forms of business borrowing. Bank debt is dangerous because payments are still due even if sales drop.