Growing a business requires capital. The financial investments needed to increase a company’s revenue and profit can include anything from marketing campaigns, hiring salespeople, and product development to updating technology, business coaching and consulting, and even upgrading or expanding office space. Yet women business owners often limit their business growth simply by the way they choose to finance the growth of their companies.
The proof is in the statistics. Although women own 40 percent of U.S. businesses, their companies generate a tiny 2 percent of the total revenue generated. In general, women-owned businesses are small, and their growth is limited and slow.
At the root of this limited growth is a common misperception about debt. To ensure your company has access to the capital it needs to maximize its growth potential, it’s important to overcome this limiting belief and prepare now for the day when your business needs capital.
Check Your Mindset
When it comes to accessing capital that their businesses need to grow, men and women business owners take different approaches. As a whole (and there are exceptions, of course), men are more comfortable with risk, including assuming debt. Women, on the other than, avoid debt – whether it’s a loan or even credit card debt. Women tend to view the fact that their businesses are debt-free as a point of pride.
So how do women fund their business expansion? By trying to increase – and then reinvesting – profits. Bootstrapping growth keeps a business debt-free. But it limits the pace and scale of your business growth. Some growth initiatives requires a significant financial investment. If you have to wait to accumulate enough savings to pay for that growth, you risk losing months or even years before taking advantage of those opportunities.
The misapprehension of debt that many women business owners share is often driven by a lack of financial planning, as well as not having a clear understanding of the various financial instruments available to offer the capital your company needs to grow.
Which Type of Capital Is Right for You?
As a business owner, you have many options for accessing the capital your business needs. The option that is right for your company depends on your business and which industry you’re in, as well as your goals for business growth and even how prepared you are right now to take advantage of these options.
Let’s look at the most common options for business capital:
- “Aunt Agnes’s Mattress,” which is what I call loans from friends, relatives, and even yourself.
- Line of credit, which is a preset limit that you can borrow against and pay back as you choose. You can borrow capital to pay for a growth initiative today, then pay off the line of credit months down the road once the initiative is producing results.
- Asset-based lending, which a loan or line of credit that’s secured by assets, typically your receivables. If you default on the loan, the lender will take possession of the assets you offered as collateral.
- Equipment loans, which is special financing available specifically to finance the purchase of business equipment.
- Long-term loans, which is a defined lump sum that you pay back in predetermined amounts over a specific time period, typically years.
- Real estate-secured loan, which is a loan that is secured by real estate you own. If you default, the lender takes ownership of your real estate.
- Angel investors, who are individuals who offer capital in exchange for ownership equity or convertible debt (a loan that you repay with equity or stock). They often work with start-ups.
- Private equity, which is investment from a private equity fund that assumes an ownership interest in your company. These funds aim to produce a positive return for their investors over a number of years.
- Venture capital, which is investment from a venture capital firm. These investors also expect to play an active role in your company’s growth. The difference between venture capital and private equity, however, is that venture capitalists expect to generate a fast return on their investment.
- Private investors are similar to private equity funds in that they expect you to give up a substantial interest in your company in exchange for the capital they provide. In this scenario, you’re working with an individual rather than a fund backed by multiple investors.
- Investment funds pool the financial resources of multiple individual investors, providing venture capital or long-term loans. Investment funds are often organized and headed by women specifically to support women-owned businesses.
- Revenue-based lending are loans where the payment is a percentage of revenue.
Which Type of Lending Is Best for Your Business?
There are many types of capital you could access to fund your company’s growth. But not all will be a good fit. Perhaps the most important question to ask yourself as you consider which type of financing might be right for your business is whether you want a partner. As you can see from the list above, some forms of lending require you to give up a percentage of ownership in exchange for financing. The tradeoff may be worth it, as lenders who require ownership may have business expertise and knowledge that compliments yours. (Think about the deals made on “Shark Tank,” and how happy the business owners are to get access to the Sharks’ expertise and connections.)
If you don’t want to share ownership of your business, traditional forms of financing — such as a line of credit, long-term loan, asset-based loan, equipment financing, etc. – will be best. Another option is a combination deal, where part of your financing is provided via a loan, with a smaller percentage being given as an equity deal.
Another important consideration is how quickly you want to grow your business. Profitably growing your business by 50 percent is very different than trying to grow your business tenfold – or even 100X. Each of these scenarios requires different growth initiatives and, therefore, funding injections.
Don’t Wait – Prepare Now
Even if you have no foreseeable need for financing, the best time to get your finances in order is now. It’s much better to be prepared to act quickly vs. scrambling down the road when you desperately need to access capital.
To secure financing, lenders will need assurance that you will be a good steward of their money. To demonstrate your worthiness, you’ll need to:
- Know and understand your key financial numbers. Lenders will have questions about your financial statements, and they’ll expect you, the business owner, to answer those questions. You should also have a solid understanding of the relationship among the various numbers on your financial statements.
- Have a plan for growing your business. Not only should you be able to explain what you’ll do to grow your revenue, but you also need to be able to speak intelligently about how your various planned actions and decisions will impact all of the numbers on your financial statements.
A Word of Caution About Your Accountant
Your first instinct may be to call your accountant for help with preparing your numbers and financial plan. But your accountant may not have the right expertise or focus. Accountants generally prioritize the importance of minimizing taxes. But minimizing taxes means minimizing profits – and when you do that, you become unbankable in the eyes of lenders.
Lenders want assurance and proof that your business is profitable. Profits are what will fund the repayment of the loans they make to your business. If you minimize your profits to minimize taxes, your business looks like a bad risk. Therefore, if your business is currently not profitable, your first priority should be to turn around your business so it generates a profit. If funding is required to make this happen, your best bet may be financing via asset-based receivables.
If your accountant fits the traditional mold of being focused on minimizing taxes and profits, a better bet may be to hire a Chief Financial Officer (CFO). CFOs think strategically, using financial statements to diagnose what’s happening in your business today, as well as predict how the choices you make will impact your numbers in the future. If your company doesn’t need a full-time CFO, choose instead to work a virtual fractional CFO such as Evolve CFO Services. Our strategic professionals can work in conjunction with your accountant to create a strategic financial plan, organize your financials so your business appeals to lenders, and manage the various financial tools needed to properly run your company’s finances.
Want help identifying what it will take to get your business prepared to access the capital it needs to grow? Book a complimentary, no-obligation Financial Strategies & Solutions Session with one of our highly trained virtual CFOs to explore how we can help.