Anybody who owns a small business did not do so merely to break even.
While it’s a quaint notion to believe that some business owners have a mission to provide a helpful product or service to many customers, the truth is that entrepreneurs start businesses so they can make a profit.
And just achieving a profit isn’t enough for most business owners. Maximizing profits is the real goal for most. That is the ultimate measure of a company’s success, and it is what determines whether a business has the potential for genuine growth.
Profitability is defined as a company’s ability to generate revenue that exceeds its total of expenses. Selling products or providing a service to customers are the sources of a business’ revenue, while its expenses come from the generating of its products or services, payment of employees, facility costs, material costs, rent or property taxes.
A company’s objective isn’t just to turn a profit, but to produce a profit margin that is substantial. How much money a company generates from each sale versus how much it costs to make that product to generate that service is how a profit margin is arrived at. Subtract those costs from what you are charging a customer to pay for your product or service to come up with a figure that represents your profit margin.
It’s important to differentiate between profits, income and cash flow. The financial earning received when a company’s income exceeds the expenses and costs necessary to keep it running is its profit.
The money that a company makes on the sale of its products or services prior to the deduction of expenses is that company’s income.
Cash flow equals the money that moves in and out of a business.
An entrepreneur isn’t just striving to be “in the black,” but to actually thrive enough to enhance continued growth. Visionary business owners aren’t just looking to survive, they are looking to build upon their profits and grow substantially. The more profitable a business shows it can be, the more likely it is that the business will be able to get funding from banks or investors.
There are different times that a company owner might be inspired to seek outside funding for his or her company, whether thorough small business financing or other means. One stage would obviously be during the startup phase, before a business has generated any revenue but at a point when funding is needed to get the business off the ground. But another stage that would call for additional capital would be when a business reaches a growth phase.
What are some funding options that a small business owner could consider?
Equity financing: The sale of an ownership interest process to various investors for raising funds for business goals is equity financing. By selling shares in a company, a business sells ownership in its company in return for cash. That investment could come from family and friends, professional investors such as venture capitalists, or initial public offerings (IPOs). Unlike debt financing, equity financing does not involve the borrowing of money that must be paid back.
Crowdfunding: Tapping into the combined resources and contributions of friends, customers, family and possibly individual investors by using social media and online platforms set up for this specific purpose is called crowdfunding.
The process of crowdfunding—a financing option that is open to anyone–entails collecting small amounts of capital from a large base of contributors, accessing a sizable potential pool of resources. The business owner who seeks to raise capital through crowdfunding essentially is delegating the process of an application to a large group of people instead of relying on the decision of an individual lender. Crowdfunding sites generate revenue from a percentage of the funds raised.
The advantages of a crowdfunding approach to raising working capital include its broad reach, the ability to present one’s business in a positive light to potential investors, the attention to one’s business derived from public relations and marketing on a crowdfunding platform and efficiency. Crowdfunding helps a business to streamline its fundraising efforts with a single profile that is comprehensive and into which the entrepreneur can funnel all prospects and potential investors. Presenting one’s business to a large audience at one time eliminates the inefficiencies associated with printing documents, putting together binders manually entering every update.
Crowdfunding can be based on donations, rewards or equity. A funding effort that is based on donations comes with the understanding that there is no financial reward to the donor to a crowdfunding campaign. A campaign based on rewards would give something back to the contributor, such as a product or a service provided by the business that is seeking the funding. Equity-based funding campaigns invite contributors to become part-owners of the business by exchanging capital for equity shares. As equity owners, the company’s contributors get back a financial return on their investment as well as receiving a share of the profits in the form of a dividend or distribution.
SBA Loans: Debt financing means that the company borrows money and then must repay the lenders with interest over a specified period of time. The U.S. Small Business Administration (SBA) offers commercial financing backed by the SBA through its SBA 7(a) loan program. The most common type of SBA loans, an SBA 7(a) loan assists businesses in the purchase or refinance of owner-occupied commercial properties up to $5 million. This loan also gives the business owner a chance to borrow funds for working capital.
These loans are suited to assist businesses that are unable to secure credit anywhere else. With an SBA (7a) loan, the borrower can purchase land or buildings, build on new property or renovate existing property as long as the real estate will be occupied by the owner. Through an SBA (7a) loan, an entrepreneur can borrow up to $5 million through an SBA-affiliated lender. The maximum allowed interest rates for the program are based on the Wall Street Journal Prime Rate plus a margin of a few percentage points. Interest rates can be fixed, variable or a combination of the two. Loan terms for 7(a) loans that are used for commercial real estate may be as long as 25 years for repayment. Each monthly payment would be the same until the loan is fully repaid.
Backed by the U.S. Small Business Administration, this type of financing can assist in the purchase or refinance of an owner-occupied commercial property. These 504 loans actually are a hybrid form of financing: One loan coming from a Certified Development Company (CDC) for up to 40% of the loan amount, and one loan from a bank for half the loan amount or greater. Low down payment requirements make CDC/SBA 504 loans ideal for growing companies that might not have more than 10 percent to use as a down payment.
A CDC/504 loan is for either 10 years or 20 years. Borrowers get a fixed rate rather than the prime lending rate. Applicants will be required to show the lender a business plan, exhibit proof that they’re capable of managing a business and present projected cash flow data–all to assure the lender that the loan is likely to be repaid without complications.
Private financing: Some small business owners might ask family or friends to assist them with the funding of a new venture. These lenders are often the ones who would be most likely to provide the finding without demanding astronomical interest rates. Some entrepreneurs, though, are skittish about the prospect of involving those close to them in their finances because of the risk that it could cause problems with their relationships with those people.
There are other types of funding that can help a business in its quest to increase profits. Some of those options include:
Short-term loans: A loan with a fairly short repayment period, a short-term loan is one in which the
borrower receives his cash in a lump sum upfront, then repays the loan, often with some pretty sizable financing rates. Some short-term loans allow the borrower to make extra payments to pay it off sooner. However, some short-term loans actually carry penalties for paying them off too early. Short-term loan options generally have a term of 12 months or less.
Payments on short-term loans are required frequently — sometimes once a week, or, in some cases, every day. Although the business credit requirements are not as strict for short-term loans as they are for regular term loans, the frequent payment schedule may be burdensome for someone in a new business without a lot of cash flow at that moment. But a businessperson who needs a loan in a hurry still might opt for a short-term loan because it may be easier to secure than other forms of financing.
Business lines of credit: Sometimes a business line of credit can be approved in as little as 24 hours. Depending on the lender, you might only need a credit score of 500 to qualify for a business line of credit.
When a lender provides pre-approved funding with a maximum credit limit, that is known as a business line of credit. If the borrower is approved for this line of credit, funds can be accessed whenever they are needed until the established credit limit has been reached.
Because the borrower is only paying interest on the amount that he or she withdraws, a business line of credit can be advantageous for business owners who don’t know funding they will actually require, or when they might need it.
The drawback to a business line of credit is that the loan will be at a rate that might be considerably higher than other types of loans. This is especially true in recent months, since the Fed has been continually raising interest rates for the past year. How costly that would be is heavily dependent on the amount of funds the entrepreneur ends up using.
If a business owner needs to establish a favorable credit history, a business line of credit could help him or her do that.
Merchant cash advances: Another way to facilitate access to money needed to finance one’s business expenses is a merchant cash advance. In this instance, a company grants the borrower access to cash. The borrower is then required to pay a portion of his or her sales made with credit and debit cards, as well as an additional fee.
A merchant cash advance does not require collateral or a minimum credit score. However, merchant cash advances to business owners involve higher costs than most other forms of borrowing.
A merchant cash advance is an expedient way for entrepreneurs to get their hands on capital when the need for cash is urgent. A business owner might receive a bill he or she did not expect, or the owner might need the cash fast in order to complete a time-sensitive deal that must be decided upon sooner rather than later.
With a merchant cash advance, a business owner can potentially get hold of a large sum of funding in a hurry. The turnaround actually could be realized in as little as 24 to 48 hours in some cases. A merchant cash advance could be for a sum of a few thousand dollars up to as much as $200,000 with a minimal of paperwork. The “heavy lifting” in a merchant cash advance is usually handled virtually.
Repayment of a merchant cash advance is based on the credit card receipts of a business. If the company has had a slow day, the repayment amount for that day is reduced. Funders of merchant cash advances can take 20 percent of credit card receipts on a daily basis. How much a funder takes is tied to a company’s success more than it is to the calendar.
Companies that provide merchant cash advances do not stress credit scores if the borrower comes into the deal burdened with a less than stellar credit history. Lenders instead will make their decisions based on current operations and sales projections. For a business that endured a rough start financially, but which still anticipates a rosier financial future, a merchant cash advance might be the best option for a fast business loan.
There is certainly a potentially steep price to pay, though, for the ease and expediency of merchant cash advances. The factor rate, which is a percentage — often expressed as a decimal ranging from 1.1 to 1.9 — that shows how much extra a borrower owes on a loan, carries a high effective annual percentage rate (APR), and repaying it can be a genuine burden on a company’s cash flow.
Aside from funding, there are plenty of other strategies that a small business owner can employ to boost profits. Those include reducing overhead costs, raising prices on what you’re selling and maximizing your presence on social media to increase awareness in your company.