Building a small business to the point where it is generating a profit requires financial investments long before money starts flowing in.
Small businesses come in many shapes and sizes, but earning this designation depends on three factors:
Small business owners are an integral part of the economy. According to the Small Business Administration, the U.S. had nearly 32 million small businesses generating more than 40% of the nation’s economic activity. These businesses employ nearly half of the American workforce and create millions of new jobs each year. In doing so, they help create a path to financial stability for the business owners and their employees.
The numbers are impressive, but the value of small businesses extends beyond the dollar amounts. Small business owners establish roots in their communities and become important players in the daily lives of the people who live there. Their customers are their friends and neighbors. They bring new opportunities to neighborhoods and contribute important tax dollars to the local area that help fund projects to boost the quality of life for residents.
Perhaps even more important, small businesses create opportunities for traditionally marginalized groups. More than 18% of small business owners in the country are minorities, and nearly 20% are women. During the Great Recession, businesses owned by minorities and women suffered disproportionate job losses and were more likely to close. Yet these businesses were able to create 1.8 million jobs between 2007 and 2021, a period of time when businesses owned by white males lost 800,000 jobs.
Funding options played a significant role in the decline of minority- and women-owned businesses at the time. These business owners were more likely to fund their businesses through home equity, a source of capital that dried up as housing prices declined. For some, it may have been the only funding option available. Large banks approve fewer loans for minority and women business owners. This lending gap may create challenges for small business owners in search of funding sources, but it also presents an opportunity.
Access to funding is essential for small businesses. Lack of money can be a barrier to entry. An entrepreneur may have an industry-changing idea but may not be able to turn it into a reality without money for permits, machinery, research and development, advertising, and infrastructure. Startup funding also includes cash flow to keep the business operating until it is able to turn a profit.
Building the business to the point where it is generating a profit can take time, and it requires financial investments long before money starts flowing in. Here is a closer look at how this unfolds. Company ABC wants to produce a line of customized nutritional supplements. The owner starts by soliciting market research to determine the demand for the product, locate potential target markets, and identify the competition. With the preliminary business plan in place, it is time to start developing and testing products. In this case, they may need to partner with a lab or research facility and hire professionals to create formulas for their product lines.
The formulas must go through rounds of testing to ensure they meet customers’ needs. Ideally, they find the right formula on the first try, but they also likely need to adjust formulas and continue testing a few times until they find the right combination. At that point, they can begin production. This stage requires even more cash for infrastructure, whether the company purchases its own equipment or rents equipment from an existing manufacturer.
With production underway, the business owner can focus on reaching out to potential customers and marketing the product. Effective marketing takes expertise and time — it may not be enough to set up social media accounts with pictures of products. They have to find ways to rise through the noise of social media, and their competition is probably paying someone to do that as a full-time job. Organic growth on social media is possible, but it takes time. At this point, the business needs products in people’s hands and money coming in. It may not be able to wait for that growth.
After a successful product launch, the business owner’s focus can shift from developing the business to generating more business. This can include expanding into a new target market or adding to the existing product line. As in the initial development phase, the business must pay people for their work. In this case, it has to spend money to make money. Even more important, the very success of the business may depend on the company’s ability to access and manage cash flow until it generates enough sales to cover expenses.
On paper, business owners have several funding options, and they fall under two broad categories: equity funding and debt funding. With equity funding, the business owner exchanges a percentage of ownership in the company for cash. On the upside, the company does not have to make regular payments to pay back a loan. The business owner, however, gives up some control of the company and profits. What can be a convenient decision in the early days of a company’s journey can lead to a significant amount of money over the course of a lifetime.
Common sources of equity funding include:
To secure debt funding, business owners apply for a loan that they must repay over a period of time. The lender does not seek ownership of the business but does expect to get back the money they lend, usually with interest. This means the business owner retains control of the company, but they must make sure they have the cash flow to cover the payments. Until the loan is paid in full, they may see some cash flow restriction, which increases their risk. It’s also possible for them to lose the business or any assets used to secure the loan.
Common sources of debt funding include the following:
Borrowing money is fraught with its own set of challenges, most notably access. For many small business owners, getting approved for a loan from a bank or government-backed agency is unlikely. This is especially true for startups due to their high failure rate. Banks do lend money to small businesses, but they have to show they have the means to pay back what they borrow. This proof may include collateral, such as a valuable asset and a significant amount of cash on hand.
It’s helpful to note here that debt isn’t inherently bad, but no one really wants to borrow money unless they have to. Good debt can actually put money in the business’ bank account and increase the company’s future worth.
Company ABC may decide to use debt to purchase a manufacturing facility and equipment to produce its supplements. This type of debt, which can increase the company’s net worth, can be beneficial. It also creates an opportunity to demonstrate creditworthiness. The business can establish a positive payment history that it can leverage in the future to secure funding.
On the other hand, bad debt decreases the company’s future net worth. Borrowing money to purchase assets that will decrease in value or will not generate income can be detrimental to the company’s solvency. Additionally, sources that charge fees, levy high interest rates, or come with strict repayment terms effectively cost more money over time than they are worth. For example, Company ABC may need to use a high-interest credit card to buy raw materials. The interest charges take away from the profit they are able to generate, which can cost more money over time.
Loanspark offers an alternative for businesses and their small business customers: co-brand business lending products. This is a win-win solution for both parties. If Company ABC’s packaging vendor also offers small business lending services, when it is time to place an order, Company ABC isn’t limited to paying cash, applying for a loan, or charging the purchase to a high-interest credit card. The vendor (powered by Loanspark) is able to offer financing at the point of sale, with a greater selection of products than are available through banks, credit unions, and alternative lending sources.
Company ABC now has access to the funding it needs to complete the purchase to produce the product it needs to generate income. It does not have to complete mountains of paperwork and wait for approval from a bank — or worse, a denial. The vendor also benefits from this arrangement. The sale is complete. It does not risk losing the customer to another vendor, and it builds a stronger relationship between the two companies. Best of all, Company ABC only works with the vendor it already knows, and the vendor only has to promote the service to the customers it already has.
All of this takes place in record time compared to traditional lenders. Because of Loanspark’s powerful Marketplace of Lenders, Loanspark has more flexibility when deciding whether to extend credit, and it can consider more than the numbers on the page when extending a loan to a customer. Because there are no underwriting delays to hold up the transaction, you close more deals, and your customers can keep moving at the speed of business.
That’s just a fraction of the benefit you enjoy when you offer your customers business lending products. In addition to solving a problem for your customers, you create an opportunity to increase customer loyalty, boost sales, and protect your resources. There’s no need to learn how to build and operate a business lending platform. You can let the experts take care of that for you so you can focus on what you do best.
Loanspark’s business lending as a service program (BLaaS), lets you leverage our expertise and industry knowledge to maximize sales potential. Best of all, you stay in complete control of your brand through the entire process. Protecting your brand is essential to the success of your business. It’s a symbol of trust for your customers, and it helps you set your company apart from the competition. Loanspark lets your customers continue to see your personnel and interact with your brand. They never know another company is operating behind the scenes.
We handle everything from licensing and compliance to servicing the loan. An entire system can be ready to go in 14 days or less. All you have to do is promote the service to your clients. You’ll even earn referral fees to generate an additional income stream for your own business.
Here’s how it works:
Loanspark is a 100% turnkey solution. This means you have one job: promote the service. We take care of the rest: the website, the call center, the lending platform, and the capital. To learn more about our co-brand lending solution, contact us now!