At strategic points in the business life cycle, financing may be required to reach the next level of desired growth. For California manufacturers, several options exist, but most financing paths begin at the same trailhead.
Plan for Success
Before you apply for financing, develop or update your existing business plan to clearly communicate your business goals and strategy. Most lenders or investors will not consider funding a business without seeing a solid business plan, so invest the time to translate your vision onto paper.
Your business plan should cover:
- Executive Summary
- Market and Competitive Analysis
- Company Description
- Operations and Management
- Marketing and Sales Strategies
- Service/ Product Line
- Funding Requirements
Tip: When writing a business plan, keep in mind that your audience is the prospective lender or investor, whose decision will hinge on their perception of your plan’s likelihood to return their investment. Emphasize how financing will be used to meet goals and make good on the investment.
Finding a Funding Source
Depending on your financial and credit history, the amount of desired financing, and the market potential of your product or service, one or more of the following sources may be a good fit.
Conventional financing through a banking institution comes in several forms:
- Line of credit allows borrowing as needed, giving business owners flexibility to smooth out financial highs and lows as well as control over the outstanding balance that accrues interest.
- Term loans are generally offered at a fixed rate with a monthly payment, similar to a home mortgage, and providing a larger amount of cash up front to the borrower.
- Equipment loans provide financing for equipment of all types, and may feature a lower interest rate than other loan types, since the loan will be secured against the equipment’s value. Don’t miss our recent post on California’s new tax exemption for equipment purchases.
The last several years have seen a resurgence in commercial lending through community banks and credit unions, which may provide a business-friendly and affordable alternative to larger banks.
SBA Loans are similar to term loans, but are guaranteed by the U.S. Small Business Administration (SBA). Since “Uncle Sam” is essentially cosigning a portion of the loan, lenders are able to offer longer repayment periods, lower payments and more competitive interest rates than conventional financing. Qualifying for an SBA loan can take a while, but the SBA Express program features a 36-hour turnaround in exchange for a reduced guarantee.
Venture Capital (a.k.a. “Angel Investing”), popularized by ABC’s hit show Shark Tank, is an equity (i.e. ownership in your company as opposed to lending) arrangement with an investor. Angel investors tend to favor early-stage and high-potential businesses that need financing to experience breakout growth. The Angel Capital Association maintains an online listing of accredited angel investing groups.
Non-conventional financing tends to be expensive, whether credit cards, personal loans or factoring. Factoring (aka “accounts receivable financing”) involves the selling of accounts receivable to an institution to receive a large portion of the face value in advance. Once the factor collects on the account, they subtract a pre-negotiated fee and return the balance to the borrower.
Don’t Leave Money on the Table
Every year banks, investors and the U.S. government are investing billions of dollars in small businesses. With a solid plan and a compelling business opportunity, your business could be next.
Looking to relocate to or expand in California? Check out our post on the California Competes program, providing tax credits for business investment in the state.