Across the US, millions of entrepreneurs are working day and night to grow their businesses — and take things to the next level.
And starting a company isn't easy. According to the Bureau of Labor Statistics, 20% of startups fail within the first two years. So if you're among the firms that have beaten the odds, and reached $1 million in annual revenue, it's cause for celebration.
But here's the thing: entrepreneurs are restless. They're never satisfied. They're always looking to the next milestone, and coming up with novel ways to grow.
To achieve these ambitions, funding is a great option. Securing capital can allow you to expand faster, invest in your company's future, and address the pain points that are holding your business back from greatness. Here, we're going to explain how this process works — and present popular options for firms of your size.
The Challenges You Might Be Facing
No two ventures are the same — but from agriculture to accommodation, and from real estate to retail — young companies at the $1m revenue mark often end up suffering similar issues.
Let's begin by talking about the elephant in the room: cashflow. Overdue payments can have a huge impact on the financial health of your business. Indeed, figures from Melio and YouGov suggest one in four American businesses have had to wait 30 days beyond an invoice's due date — with 30% of CEOs fearing that late payments affect their ability to stay open. They prevent entrepreneurs from reinvesting profits — and if you're in an industry that produces a smaller volume of products on high-value contracts, this can have even more of an impact.
Some cashflow issues may be linked to the fact that you're frantically trying to keep across dozens of strands to your business all at once — starving you of time to enact policies that would have a huge benefit. Figures from Clutch suggest 54% of small businesses lack an official budget, creating a risk that costs will run out of control. Enforcing some financial discipline can pay huge dividends, not least because most firms that set limits stick to them.
This brings us to the problems that are nice to have: uncontrolled growth. It's thrilling for entrepreneurs when an idea takes off — with queues snaking outside shops, reservations made months in advance, and new products selling out in the blink of an eye. But while all of them are compelling signs of success, they can bring headaches of their own. Your business might have to pay suppliers upfront or within 30 days — but the retailers who stock your goods may only settle their accounts in 60 or even 180 days. This can create a huge financial black hole that's difficult to plug.
Here's the problem: fixing this can take money you don't have. The solutions you're thinking of may include opening additional locations, striking up new relationships with manufacturers, or beefing up your back office so operations run smoother. While $1 million in revenue is certainly healthy, the capital left to reinvest could be greatly diminished once all your costs are taken into account. And without an external cash injection, you run the risk of stagnating — or worse, missing a golden opportunity to scale. As the old saying goes, sometimes you need to speculate to accumulate.
Help is out there — and there are ways of attracting the investment you need to keep your business growing. The first step is to get match fit, by ensuring that your company is as attractive to credit providers as possible.
Your Options for Funding
This brings us to the most important part of all — deciding which funding model is best for your business as you vie to accelerate beyond $1 million in annual revenue.
There's a lot to consider, and it takes a great deal of thought. A primary concern will center on whether you need to give equity away. Think of an entrepreneur, and your mind may be instantly transported to Shark Tank, where a sweaty businessman with a brilliant idea ends up giving a 50% stake away to a multimillionaire. It doesn't have to be this way. You can secure capital without sacrificing a share of the company you've painstakingly built.
Next, it's time to reflect on the urgency of this cash injection. Some lenders can take weeks, if not months, to make a decision on whether to proceed with an application — and in certain circumstances, this timeframe just won't do. What if your dream business venue has just become available, or an unexpected expense has emerged that needs to be settled immediately?
Let's walk through the most common funding types for a company of your size.
Business charge cards
This approach is ideal if you need short-term capital — alleviating temporary cashflow issues. Business charge cards can bridge the gap between paying your suppliers, and receiving income from your clients. For example, with Amex, you can have up to 56 days of interest-free borrowing, provided you pay the bill in full on its due date. While you can tap into luxury travel and retail rewards — and rack up Membership Rewards points — it's crucial to remember this isn't a credit card, and that means high interest rates if a bill isn't paid on time. For longer-term borrowing, you need to look elsewhere.
SBA loans
Another option is to secure funding from the Small Business Administration, an agency that offers loans that are low interest and backed by the government. Microloans of under $50,000 are available — rising all the way to 7(a) and CAPLines loans of $5 million to deliver working capital; investment in inventory, labor and materials; or the refinancing of current debt.
Advantages of SBA loans lie in how they offer lower interest rates and longer repayment terms than other financing alternatives — with the administration shouldering the burden if a business defaults on a loan. But this form of borrowing has strict criteria, meaning you need to exhaust personal assets first and wade through a lot of paperwork. Unfortunately, in some circumstances, you may also be waiting 90 days to hear whether you're approved.
Inventory financing
This approach is ideal for companies that need capital to buy stock. Here, lenders provide a line of credit that can be used to pay suppliers — with the resulting inventory used as collateral. Typically, businesses that go down this route lack the financial history to secure a conventional loan — and newer firms that have only been operational for six months can be eligible.
However, there are pitfalls to consider. Your company may not get the full amount of funding you were hoping for, and interest rates may be pegged higher for younger ventures. Lenders may look less favorably on applications for inventory that runs the risk of depreciating over time — and if the economic climate is uncertain, with consumer spending in decline, rejections can rise if there are concerns that inventory will lie unsold in a warehouse for too long.
Invoice factoring
We've talked about how late payments can be a running concern for businesses like yours — and a common question is this: can outstanding invoices be leveraged as a funding source?
The answer is yes. Invoice factoring involves lenders paying up to 90% of the cash you're owed immediately — with the remaining balance sent once your client settles the bill. This means revenue will be directed to a dedicated account operated by the factoring company, rather than your own business bank account.
Depending on the lender you go with, your business may be responsible for shouldering the cost of non-payment — or they may chase up late invoices on your behalf.
While this can dramatically improve cashflow, there are some cons to consider. For one, it'll be clear to your customers that you've entered into this arrangement, and that might affect confidence. Factoring companies will also charge a commission for their services, and this may rise if your company has a poor credit rating, or if there is a high risk that your clients will fail to pay what's owed. All of this can eat into your profit margins — which may be razor-thin already — making it suboptimal to rely upon on a regular basis.
Business bank account loans
If you have a substantial trading history, your business banking partner may also be prepared to offer you a loan. They'll request to see information about your profits and losses, and how you're planning to use this financing. Loans for a larger amount may need to be secured against your company's assets, or even against your house. Interest rates are often higher because some banks are nervous about lending to smaller firms — and once again, you could face a long wait before you get an answer.
Revenue-based lending
Most sources of funding fail to take into account fluctuations in your company's performance. New approaches have emerged where your monthly bill is set to a percentage of revenue, say 20%. This would mean that — if you have a blockbuster January with turnover of $150,000 — your repayment would be $30,000. But if February's takings dwindle to $80,000, the borrowing would reflect this, with the bill tumbling to $16,000. This isn't a loan — instead, it's effectively a pledge of future income.
Financing based on your upcoming sales enables you to expand without paying punitive levels of interest — keeping things dynamic. Instead, a factor rate is used to calculate the cost. This is based on circumstances that include the sum being borrowed, the length of a repayment term, and the company's credit profile. It's indicated in the form of a multiplier — such as 1.2x — which essentially means that $1.20 would be repaid for every $1 borrowed. Crucially, an entrepreneur's own score isn't taken into account during this process.
Getting Ready for a Funding Application
The process of preparing for a business investment delivers three huge advantages. First, making your books look as healthy as possible can help alleviate some of the cashflow issues you've been dealing with. Second, investing this time gives you even more of a handle on the current state of your business — from where cash is being spent to your strongest revenue streams. And finally (but most importantly of all) it considerably improves your chances of getting accepted.
In a way, it's not too dissimilar to applying for a mortgage. There are many no-nos when you're hoping to get on the housing ladder — such as changing jobs, getting into debt or making extravagant purchases. All of these factors can greatly affect your chances of approval, and the process for entrepreneurs is much the same.
A good place to start is by scrutinizing your expenses — and seeing whether there is any room for improvement. Could you switch to a cheaper vendor without compromising the quality of your product? Is too much money making its way to non-essentials? Are there inefficient marketing strategies can be cut? Could buying in bulk generate savings in the long run? Are your staff in the right place, and have inefficiencies emerged as you scaled? Now is the time to ask searing questions about your bottom line — and start seeing your accounts from a lender's perspective.
Given the recent inflationary pressures in the economy, close attention also needs to be paid to your current business relationships. If you have a client where prices have been frozen for several years, now might be the time to start renegotiating terms. It's also worth entering discussions with existing suppliers to see whether they can give you a better deal. To secure funding on the best terms possible, you need to look at the money coming in — not just what's going out.
Now is the time to start drumming up new business and cementing relationships with your best customers. Retaining existing clients is always much easier than acquiring new ones. Making them feel valued through bespoke discounts and added perks can spur more orders. Formalizing current relationships can also go a long way — especially if you make the switch from ad hoc contracts to quarterly or annual contracts. Not only will this create added certainty in your sales pipeline, but a strong order book will resonate well with the lender reviewing your application.
And never forget this: data is your friend. Take a moment to scope out the state of your industry — from its current size to the compound annual growth rate. Understand your competitors in the marketplace, and how you offer a point of difference. Finally, explore how statistics in your own operation can paint a compelling story about what future growth would look like. The whole point of this exercise is giving lenders confidence, showing you're on top of your business, and demonstrating you have a strong business that can and will meet its financial obligations.
What Will Lenders Expect?
The initial application process can take about 10 to 15 minutes depending on the type of financing you go for — and once this has been completed, an illustrative proposal is delivered.
However, there are other necessary checks that need to be completed — including Know Your Customer and Anti-Money Laundering measures.
It's important to remember that there are some requirements for businesses that want to go down the route of making repayments based on their revenues. For one, at least 24 months of financial history is required — enabling lenders to get a fuller picture of how the company is performing, and whether it's enjoying upward momentum. Proving year-on-year revenues of over 15% can make an application especially compelling.
This also needs to be accompanied with your company projections and financial statements looking ahead to the next 12 months. This should offer a forecast of your sales, expenses, cashflow, balance sheet and income statement — and can also give lenders an insight into how injected capital would be used.
Depending on the type of funding you go for, at least $100,000 in monthly revenues may be required — although if you're already hitting $1 million on an annualized basis, this shouldn't be too much of a concern. Your monthly turnover will likely have an influence on how much your company is eligible to borrow — as the maximum cash injection available is typically capped at 40% of this figure. This means that, if the business is bringing in $150,000 per month, the credit limit would be set at $60,000.
You may also be asked why your company is looking to secure funding in the first place. Lenders are generally open-minded in this regard, but they'll want specifics on how the capital is going to be used — primarily to ensure that this corroborates with the money requested. A business plan can be invaluable in painting a narrative.
Over the course of the agreement, you should also be prepared for lenders to request updates on how the business is faring. Reporting requirements will vary, but most will insist on regular financial statements — and access to your accounting records through an API connection. Most crucially of all, they'll need to be notified if you're planning to make any substantial changes to your business model.
There may also be circumstances where you need to enlist the help of specialist lenders — especially if you're operating in certain industries. Some lenders will be unwilling to work with businesses focused on adult entertainment, cryptocurrencies or betting. This is primarily because of regulatory compliance — and in the case of digital assets and gambling, concerns about volatility. While this may eliminate some of your options, don't be disheartened as experienced institutions who know how these sectors work will be able to step in.
Time to Grow
Right now, you're at an exciting junction with your business — and as you set your sights on scaling up, serving new customers and conquering new markets, flexible financing is on hand to achieve your ambitions even faster.
But whether you're in the arts or administration, mining or manufacturing, preparation is crucial for getting optimal results. You wouldn't head into an important business meeting without perfecting your pitch, and the process of applying for capital is exactly the same.
We've already seen how transformative the world of artificial intelligence can be — shaking up everything from marketing to healthcare. And now, AI is helping companies like yours to cut down on paperwork and access just-in-time capital from a plethora of sources.
It's never been easier to synchronize your firm's financial data from external providers like QuickBooks and Capital One, and benefit from real-time decisioning and analysis about your application. After decades of slow transactions and a lack of innovation, entrepreneurs can tap into funding models that are as fast and nimble as they are.
And none of this has to be at the expense of security, with cutting-edge fintech providers going to great lengths to add further layers of security through two-factor authentication — and bank-grade encryption to give executives some much-needed peace of mind.
Fast funding shouldn't be a rarity — something that's only available to a small number of talented entrepreneurs. Every American business deserves quick and easy access to capital, without having to jump through endless hoops and hurdles. Why? Because this frees up time for the stuff you're really good at: growing your company and launching innovative new products.
