As inflation soars and economic growth slows, more Michigan small businesses may be looking to secure outside funding to keep their business operations humming.
The process of identifying and securing funding, however, can be intimidating and costly if mistakes are made. There are many funding sources available to small businesses, but choosing the right type and the right partner can be difficult.
Let’s jump in and explore:
Should Your Small Business Secure Funding?
The decision to secure business funding is not one to take lightly. But sometimes it’s necessary. A business may need to make a large capital investment, such as purchasing machinery. It may need to pay out a departing owner pursuant to an operating agreement. Or, among other reasons, it may decide that it needs to bolster its cash cushion given the looming risk of recession.
It’s not a decision to take lightly, because, as the old saying goes, “there’s no free lunch.” While there are benefits to securing funding, there are corresponding drawbacks, including the likelihood that a business owner(s) will have to sign a personal guarantee (in the case of a loan) or give up equity in the business (in the case of venture capital or private equity).
Before deciding to secure funding, particularly if it’s to shore up cash flow, a business should explore whether it can cut back on expenses and/or secure news sources of cash flow. It should also, in connection with a loan, understand how it will pay it back.
Once those avenues have been pursued, and issues addressed, and the business still decides it should—or must—secure funding, then it’s important to understand the various options.
7 Common Types of Business Funding
Before going to a third party, you may want to consider putting more money into the business yourself. If you decide to go that route, make sure to adhere to the process outlined in the business’ governing documents, such as its operating agreement. Whether such an infusion of cash is treated either as a loan or a contribution can have significant legal and/or tax implications to the business and to yourself.
Another option is to seek funding from your “friends and family” network. There’s often less friction upfront if you tap your network for funds, but many business owners don’t want to go this route for fear of mixing business dealings with personal relationships.
Many small businesses took on U.S. Small Business Administration loans for the first time through the Paycheck Protection Program during the COVID-19 lockdowns, but SBA loans are always available—not just during a crisis. Loans guaranteed by the U.S. Small Business Administration range from small to large and can be used for most business purposes, including long-term fixed assets and operating capital. Businesses can find an SBA lender through the SBA’s Lender Match tool on its website.
Just like when you buy a new or used car, if you buy a new business asset (such as an expensive piece of machinery), financing secured by the asset is often available for such a purchase. Just as a new car can be repossessed if you stop making payments on it, the business equipment can, too, in the event of a default.
A line of credit is one of the most common forms of financing. With a line of credit, your business is given a maximum withdrawal amount by the bank and it can access the funds at any time it needs them.
If your small business experiences a lag between when you sell a good or service and when you get paid for it, getting a loan against your accounts receivables (referred to as “factoring” receivables) may be an option. Factoring uses an intermediary, a factoring company, to buy your business’ invoices and advance money against them. One of the drawbacks of this source of funding is that it tends to be more expensive than, for example, a bank line of credit.
The Michigan Economic Development Corporation provides a number of funding options for small businesses in Michigan. Some are grants, such as the Match on Main program, which don’t require repayment. Others, such as the MEDC’s Capital Access program, helps small businesses throughout Michigan receive loans from banks and lending institutions.
Venture capital and private equity firms provide funding in exchange for equity in a business. Therefore, this type of funding does not need to be repaid. However, the cost of giving up equity can be significant if the business continues to grow. Practically speaking, these forms of funding are not available to most small businesses.Venture capital is typically available to high growth, “scalable” companies. And in most cases private equity firms are interested in taking larger stakes in larger businesses, rather than lots of small bets on small businesses.
Consider Your Options Carefully and Consult with a Trusted Advisor
The process of securing funding for your business can be complicated, and understanding the implications—to your business and yourself—is crucial. That’s why it’s so important to work with a trusted advisor to understand your options and protect your interests. To learn more about funding options in Michigan, and for assistance, please contact Zana Tomich.
The business and employment attorneys of Dalton & Tomich take your business just as seriously as you do. Attorneys Zana Tomich and Noel Sterett are trusted by closely held family businesses and others across Michigan and Northern Illinois as invaluable partners and counselors. We guarantee all your calls and emails will be returned within one business day so you can focus on what you do best: running your business.
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