Not All Capital is Created Equal
7 Types of Business Funding and the Different Costs of Capital
Business owners frequently get caught up in the never-ending cycle of seeking and obtaining financing. Whether it’s the initial round of fundraising to launch an idea or securing growth capital to support a company’s expansion into new markets, the questions that arise during the process are often similar, regardless of the stage. These questions include what types of financing is available and which options are most suitable.
For small businesses, securing more than one funding source can be challenging. If you find yourself in a situation where you are unable to qualify for a specific type of funding, you will need to explore other options. With so many funding sources available, it can be difficult to determine the best one for your business.
|Description||Typical Time to Fund||Typical Terms||Equity Share||Personal Guarantees||Collateral Required||Qualifying|
Selling part of your company via equity to VCs. VCs provided funding for startups that show potential for long-term growth.
|6 months – 1 year||Investment period is usually 5 years||Yes||No||No||Typically need > $1M in ARR (Annual Recurring Revenue) with a range down to $600k for high-growth businesses|
Loan based on company revenue with either fixed or variable repayment plans.
|2 weeks – 1 month||3-5 years, fully amortized||No||No||No||Profitable with growth, usually $500k in ARR minimum; Time in business >1 year|
Selling part of your company via equity. Invest in companies that are not publicly listed or traded.
|6 months – 1 year||Holding periods are from 3-5 years||Yes||No||Yes||Usually involves larger investments in mature companies|
|Merchant Cash Advance (MCA) Loans:|
Borrowing money based on business’s credit card receivables. Daily/weekly debits from your credit card receivables.
|1-14 days||6 months – 1 year||No||Yes||No||Personal credit score over a limit; Time in business > 1 year; Accepts credit cards|
|Invoice or A/R Factoring:|
The sale of unpaid invoices.
|30 days||Ongoing||No||Yes||No||Regular, recurring revenue via invoices|
Loan backed by Federal Government Small Business Administration.
|6 months – 1 year||Multiyear terms||No||Yes||Yes||Profitable with growth; Time in business >2 years|
|Line of Credit:|
Loan from your business bank.
|30 – 60 days||Ongoing – quarterly reviews||No||Yes||No||Profitable with growth, established business, good credit score|
Rates and Terms:
Venture Capital: This is predominately for startup businesses that have demonstrated high growth or new business models. Venture capitalists bring their expertise and networks to help grow your business. It can take up to 1 year to get funded by a VC and competition is fierce. VCs are approached by many founders for funding and only a small percentage make the cut. Venture capital firms that invest in your business will do so in exchange for an equity stake; you will have to give up some control over the direction of your company. Venture capitalist’s goal is to sell their stake in the company for a profit which can be a benefit to the business owner. However, this can lead to extreme pressure to grow quickly and short-term thinking versus long-term sustainability.
Private Equity: For mature businesses, this can provide access to larger amounts of funding than typical business loans. Private equity firms are more hands on and have strong incentives to help grow your business. The downside is you have to give up equity (at minimum a majority share but often 100%) in your business which can come with loss of management control.
Revenue-Based Financing: Fixed or variable monthly payments are available with terms of 3-5 years. The variable option is flexible and based on revenue, so in slower months you pay less. With no loss of equity, no personal guarantees and no collateral required, these loans can be very beneficial to profitable businesses. Interest rates are competitive and often less expensive than alternatives requiring equity. This type of financing usually comes with additional services such as networking or business coaching.
Merchant Cash Advance (MCA) Loans: This type of loan allows you to access cash quickly based on credit card receivables. However, MCA loans have some of the highest borrowing costs (can be 30% or more) and have shorter repayment terms (<1 year). The merchant services company takes out cash daily or weekly directly from your account which can cause cash flow issues.
Invoice or A/R Factoring: The benefit of this option is you can access cash on unpaid invoices before they are due providing some fast cash. However, you are paying the factoring company to obtain your own money and the fees can be very expensive. You also need to provide a personal guarantee in many cases.
SBA Loan: This can be an affordable way to secure financing with rates typically in the 5-15% range; however, it can be difficult to qualify and the loan process can take months to complete. This is not a good option when you need money in the short-term to invest in your business. You also have to provide a personal guarantee.
Line of Credit: This provides a flexible method to borrow money on an as-needed basis contingent on your approved credit limit. Rates are typically very affordable in the 5-15% range but may include maintenance fees and draw fees. You will need to provide a personal guarantee and sometimes collateral to receive better terms.
Founders First Capital Partners specializes in growth capital that is non-dilutive, does not require a personal guarantee, and does not require collateral. We help business owners scale up without selling out. Raise capital to fund your next big growth initiative, hire a sales team, launch a new product, or extend your runway without giving up equity. Ideal for fast-growing, profitable, B2B model companies with a minimum $50k in monthly revenue.