Financial Planning: How to Fund and Meet the Needs of Your Business

Sooner or later, most businesses need to find external funding, whether to invest in research and development, to facilitate capital improvements, or to fuel expansion. Of course there are multiple options for finding small business funding, and it’s important to be strategic about how you pursue those different financing options.

This will require some deliberate financial planning, but more basic than that, it will require some reflection about the kind of business you want to run. In this post, we’ll highlight some core considerations to guide those financial planning efforts.

Your Legal Structure Matters

First and foremost, it’s important to understand that there are several legal formulations you choose for your business. The legal structure you select will affect everything from your taxation to your ability to hire employees, but for our purposes today it’s important to note how your legal structure affects funding.

For example, many small businesses are run as Sole Proprietorships. A Sole Proprietorship is a business in which all decisions are made by one person, and that one person claims all the revenues as well as all the losses and liabilities.

Sole Proprietorships are easy to administer and come with minimal regulatory oversight, but they also lack the professional credibility of other business formations. When you run a Sole Proprietorship you essentially are your business, which can make it challenging to secure external funding.

When you take the time to register your business as an LLC, establishing it as a distinct legal entity, you open the door to additional funding options, including business loans and lines of credits. That’s because registering your business as an LLC signifies that it’s a legitimate endeavor, not a side hustle or a hobby.

To register your business as an LLC, you’ll need to file Articles of Organization with your state. You’ll also need to identify a Registered Agent. Here's a review of Northwest Registered Agent services, as just one example.

You could also take the extra step of incorporating your business. When you establish your business as a Corporation it allows you to issue shares, which can be a great way of attracting external investors. Of course, this also involves quite a bit more regulatory oversight, which makes this option inaccessible to smaller companies.

Understanding Different Funding Options

In addition to thinking through your business structure, you’ll also want to spend some time researching specific options to secure business funding. Note that your eligibility for certain types of funding may depend on the legal formulation of your business.

The choices for business funding fall into a handful of broad categories. Here’s a quick rundown.

Self-Funding

Self-funding your business may mean drawing from your own savings account or personal nest egg, but it can also mean soliciting donations from friends or family members. This route doesn’t really require you to have a particular legal formulation, but of course, it’s only available to those who are independently wealthy or have affluent buddies.

Business Loans and Lines of Credit

Another option is to go to a bank, credit union, or other lending agency to request business financing. The basic options are loans and lines of credit. Both options may be inaccessible to Sole Proprietors, but registering your business as an LLC enables you to explore broader options and more favorable rates.

External Investment

A final option to consider is looking for external or third-party investors. Here again, the right legal structure can help you get the best options and the most favorable terms. It’s highly unlikely that you’ll be able to entice investors as a Sole Proprietor. An LLC may give you a little bit more credibility. And with a Corporation you can actually share ownership stakes in the company, which is often the best way to attract serious investors.

Additional Tips for Funding Your Business

Beyond these core subjects of legal structure and financing types, there are a few additional tips to keep in mind. These guidelines can help you be wise and strategic as you pursue funding for your small business.

• You’ll need a business plan. A business plan allows you to articulate your basic value proposition, the sales and marketing channels you’ll use to build an audience, and some general financial forecasts. Basically, it shows potential investors or lenders that you have a sensible path forward to succeed in your business, and to provide a reasonable return on their investment.

• A compelling pitch helps, too. While it’s certainly wise to develop a smart business plan, you may also want to invest some time in crafting a succinct pitch, making it possible to “sell” potential investors or lenders even in short interactions.

• Networking is a must. Networking can open doors to potential investors and funding sources alike. Some ways to build your network include showing up to industry events, joining business associations, and leveraging online platforms like LinkedIn.

• Be ready to show some results. To secure funding, it’s often necessary to show some traction or to demonstrate proof of concept. You can do so through customer testimonials, early sales numbers, or market validation. Showing that you’ve already made progress can instill investors with real confidence in your business.

• Don’t forget the follow-up. After initial meetings or presentations, follow up with lenders and investors to keep them updated on your progress. Building and maintaining relationships boosts your odds of securing funding, both now and in the future.

Plan for the Funding You Need

Sooner or later, every small business owner will encounter the need for some capital infusion. Whether you seek investors or look for more traditional financing options, make sure you’re diligent in your financial planning. And, ensure you have the right legal structure to enable your ongoing fundraising success.

Author Bio

Amanda E. Clark  is a contributing writer to LLC University. She has appeared as a subject matter expert on panels about content and social media marketing, and also writes regularly about small business ownership.