Last week, I had the opportunity to moderate a panel for Crain’s, the Chicago-area business journal.
Billed the Small Business Forum, they put together speakers from mature, growth, and startup businesses.
I had the easy job: All I had to do was ask questions. No presentation to prepare. No speaking solo for five minutes. No coming up with brilliant things to say.
Just questions to ask…and I had help from the audience on that!
Because I was in charge, I got to ask a few of the things that I like to hear from other entrepreneurs: Work/life balance, best advice to students, favorite book, and how to finance a growing business.
The last one I asked, in particular, because it feels a bit like the chicken and the egg at Arment Dietrich of late (and something Brad Farris, Jill Salzman, and I discuss in an upcoming podcast).
You see, we can’t hire new people without clients and we can’t bring on the bigger clients we want without people.
So what to do?
Four Business Financing Options
There really are four good solutions: Bootstrapping, bank financing, angel investing, or venture capital funding.
- Bootstrapping: This is how I’ve grown the business, to date. It’s really slow, doesn’t afford you any room for risk, and definitely doesn’t allow you hire before the work is there. But you don’t have any debt, don’t owe anyone anything, and can predict exactly when the money might run out.
- Bank financing: It’s fairly easy to get a line of credit from the bank if you can produce financial statements every month that show how much cash you are expecting. A line of credit is there to help you make payroll and pay other bills while you wait to get paid from your clients/customers. It’s a nice option because you don’t have to wait until all of your invoices have been paid before you can pay your own bills. But they will loan you only 80 percent of your accounts receivables, which means if you’re expecting $100,000 in invoices to be paid, the bank will loan you only $80,000.
- Angel investing: If you’re just starting out, this is a good option. But, rather than go to strangers who accelerate a business, ask your friends and family for money. You don’t have to give up any ownership and you still get some of the cash you need to get going.
- Venture capital funding: This, of course, is the creme de la creme. The thing all entrepreneurs think we have to strive towards. If you’ve ever seen Shark Tank, though, you know asking a rich person to invest in your business means you’re giving something up…and that something is typically lots of ownership. You never want to give up more than 20 percent of your business in exchange for money. Of course, there will be some organizations that can – and will – go public so perhaps there is more room to negotiate, but all-in-all, your stake in your business is more important than growing really fast with someone else’s money.
When to Get Financing
Here’s the interesting part. Every, single panelists recommended you test your product or service before you get financing.
What you sell now is not going to be what you sell five years from now. Heck, it may not even be what you sell five days from now.
Test your product. Get a few customers. Test their viability with what you’re selling. Tweak and improve. You may even need to pivot.
For instance, we have an idea that will bring more Spin Sucks content to more people, more quickly. To test it, I’ve asked a handful of friends to work with us on it. In exchange, they get steep discounts.
For the next 90 days, we are going to test, tweak, improve, and figure out the viability of the product. If it goes even halfway as well as we think it will, we’ll soon present a business plan for financing.
Until then, we are going to bootstrap the idea, take smaller risk, and figure out what (if anything) needs to change.
Sometimes your financing options aren’t with a brand new business. Sometimes they’re a new product or service, an innovative idea, or a huge rainmaker.
Test, tweak, improve…and then figure out the financing you need.