What Small Business Owners Need to Know About Securing Capital

Dorian Cunion
Aug 5
6 min read

There are few things more stressful than knowing payroll week is approaching and realizing you do not have enough money in the bank account to pay your employees. When you decide to open a business, you do so with the hope of creating economic prosperity for yourself, improving your quality of life, and making a positive impact on the world around you. As you get into running a business, you learn that you can accomplish more with others than you can by yourself. But in order to act on this insight, you need enough cash to fund your business growth potential. Which begs the question: how do you come up with enough cash to grow?

Text What business owners need to know about securing capital.
Female business owner at bank talking with loan officer

Conventional wisdom says that you should have three to six months' worth of cash to cover your fixed expenses. This is a heuristic designed to help business owners understand a basic principle: you need cash to run a business.

While some individuals are able to run businesses on shoestring budgets, I know from working with them that they carry a significant amount of stress and anxiety. Frequently, that stress and anxiety inhibit growth, preventing the business owner from thinking clearly and leading from a place of confidence.

If you are looking to reduce the stress you carry in your business, taking time to evaluate your financing options can put you on the path to securing the capital you need to run it with greater confidence.

Common Ways to Secure Capital For Your Business

Friends, Family, and Informal Capital

One of the most common ways to fund a business is through friends and family. They know you best, and if they are in a position to provide capital, they can be a reliable source of funding. However, fear and anxiety prevent many small business owners from asking friends and family for money. They worry that they will look less than successful if they ask for loans. This is a thought that should be challenged. Some of the nation's largest businesses, such as Walmart, started with family members loaning money to one another. Anyone with cash desires a good return; if you are able and willing to pay someone back more than they would receive from a certificate of deposit or stock purchase, it is worth a conversation.

It is important to remember that all business activities carry inherent risk. When you involve friends and family in your business, you risk more than just capital; you also risk the relationship. This is why many people do not consider this a viable funding solution. But if you have enough confidence in your ability to repay the debt, it can create a win-win situation for all involved.

Learn more about the risks and benefits of friends and family loans: Business Loans From Family and Friends - NerdWallet

Crowdfunding and Kiva Loans

Another avenue for securing capital is crowdfunding and platforms like Kiva. These crowdsourced capital sources are an effective way of raising small amounts of money. They generally require strong storytelling and a willingness to engage in direct outreach. Instead of asking one person for a large sum, you ask a large number of people for smaller amounts. Typically, these programs are interest-free, which has the added benefit of avoiding extra costs for the business. The downside is that they can be time-consuming and distract from other important business tasks, making it essential to weigh the costs and benefits.

Learn more about Kiva Loans: Make a loan, change a life | Kiva

Grants and Pitch Competitions

Grants and pitch competitions present another way to attract capital. They tend to be highly competitive and require you to build a strong business case for why someone should invest. On a practical level, pursuing grants and conducting business pitches are healthy activities for business owners. Frequently, entrepreneurs do not take the time to think strategically and write down their plans. Most credible pitch competitions and grants require you to submit information related to your financials, your business strategy, your value proposition, and your intended use of funds. This is an excellent review process that should be done quarterly, and grants and pitches provide the impetus to slow down and do this important work. The downside is the preparation time required and the relatively low odds of securing funding. It is important to evaluate how much time you dedicate to searching for, applying for, and preparing pitches and grant proposals to ensure an adequate return on your time and effort.

Learn more about grant opportunities by visiting Hello Alice — Your Small Business Advisory Board

Business Credit Cards and Lines of Credit

Business credit cards play an important role in helping businesses manage cash flow issues. Frequently, there is a lag between work being performed and payment being received. This lag is risky because expenses must be paid regardless of customer payment speeds. Credit cards and lines of credit provide a safety net to help make ends meet when cash on hand is low.

You must practice financial discipline with these tools. The interest expenses related to credit cards and lines of credit can quickly eat into a business's margins, so you should use them in moderation. There may be crises when you need to utilize more than 50% of your available credit. This is part of running a business, and there is no shame in using the credit available to you. When balances run high, it is essential to pause and reflect on which expenses can be cut and which revenue can be generated to accelerate repayment. By using and responsibly repaying credit lines, you show lenders that you are capable of paying off debt, which enables you to borrow more money in the future.

Apply for a business credit card: Best Business Credit Cards - Forbes Advisor

Business Loans and Institutional Financing

Business loans are among the most effective ways of securing capital. Startups tend to secure loans from Community Development Financial Institutions (CDFIs), smaller regional banks, and credit unions. Larger and more established businesses can gain additional support by working with major national banks.

All banks and lending institutions facilitate the flow of capital by receiving money from those who have it and distributing it to those who need it. The risk tolerance of lending institutions varies by purpose: nonprofits tend to prioritize community impact, while for-profits prioritize profit generation, though both care about each.

If you are early in your business life cycle and do not have an existing relationship with a bank, working with a CDFI is a great first step. They offer technical assistance to help you understand what banks look for when considering loan applications. If you are not credit-ready today, they will connect you with resources to help you get there.

If you already have a banking relationship, one of the best things to do is to schedule an appointment with your banker to discuss how capital access works at your institution. Most banks offer workshops on becoming credit-ready, and helpful bankers will provide one-on-one coaching to guide you through the process. If you feel your bank does not provide adequate support, I encourage you to open an account elsewhere and get a feel for the level of support a different institution offers.

Conclusion

Running a business requires more than mastery of your core service. Developing business acumen and financial acuity is essential to reducing stress and improving operations. Hopefully, this article has shed light on important information you need to secure capital.

While banks and CDFIs are helpful in providing information, your role is to convert that information into a plan, and that plan into action. This is where working with an executive coach and business consultant can help. I help my clients weigh the benefits and trade-offs of different actions so they can confidently pursue business growth. When you work with me, you tap into my 21 years of business experience, along with ongoing research and education designed to ensure I provide high-quality consultation. If you are interested in learning more, email me to start a conversation about how to grow your business.

Capital Access Readiness Worksheet

Below is a worksheet I produced for a workshop on accessing capital, which provides a step-by-step guide and a readiness checklist. Check it out, and reach out if you have any questions.

Resources:

Grow your business - Small Business Administration

Capital Access Services — Bridging Virginia