How to Raise Funds as a Startup in a High Interest Rate Market Traditional bank loans may not be the best option for startups. Entrepreneurs need to consider these alternatives to secure the funding they need to launch their business.
By Shannon Scott Edited by Micah Zimmerman
Opinions expressed by Entrepreneur contributors are their own.
The world's best surfers will tell you that to be incredible, you have to wait for the right wave. Every wave you choose to paddle consumes an incredible amount of energy, time and mental concentration. If you're able to channel all of your skill and stamina into that one beautiful wave, you will be much more successful than trying to ride 50 bad ones.
As a new founder, you don't have the resources to catch every wave — nor is it prudent to do so. You must be calculated and strategic so you can make the most of your chance to make it.
The traditional bank route
For startups considering going the bank route, this probably isn't your wave. With interest rates soaring to nearly double what they were last year, free money is no longer an option. Most startups don't have the luxury of deep pockets to begin with, making traditional lending unviable. One of the few exceptions is for those running a minority-owned business or a member of a group with historic barriers to capital; in these cases, SBA loans are still worth considering because of their adjusted terms.
If you don't qualify for SBA and the bank route is your only option, here's a word of caution: wait until the rates stabilize. As with any market instability, the next twelve months will tell the country's financial future.
For those unwilling to wait out the storm, think about basic accounting: if your company is running at 50% gross profit and 30% net profit, don't make the mistake of assuming that a 4% increase in sales will make up for a 4% increase in interest on your loan. It won't. You need to increase your profit by 4% — you need to increase your sales by 12-15%. If you choose to lock yourself into a high-interest loan, be prepared with a solid money strategy and solid reasoning that justifies giving away that much money.
Another option worth considering is a line of credit. They're easier to manage, and you can see your borrowed total shrinking, similar to a checking account. At any given time, entrepreneurs are juggling a thousand different things to make their business successful, so do anything you can to simplify the financials.
Related: 4 Ways to Deal With High Interest Rates in Every Part of Your Business
The VC route
While the bank wants to know about your assets before writing you a check, VCs must be approached differently. Your asset is your three-year business plan, and it better be rock solid. As an investor, I'm looking for founders willing to eat, sleep, drink, and marry their business — and I want to make sure I know all of that about you in the first three minutes we're talking. That may sound like a lot of pressure, and it is — so is starting a successful business from the ground up.
As a VC, I'm looking for a founder who knows the market, their product, how much money they need and what they will spend it on. The minutiae can come later, but if you can't convince me that you're fired up about your idea, and you've done your homework, it's a waste of both of our time. One of the first red flags is when entrepreneurs aren't willing to commit all their time and money to their own endeavors. If you're hoping to maintain another job or want VCs to invest money into a plan you're not willing to invest in yourself, you have the wrong approach.
When you approach a VC, ask for more than you need. The person who comes to me and tells me they need $300k but is asking for $500k is the person I want to talk to. At the end of the year, entrepreneurs often find themselves back at the VC's door asking for more money simply because they failed to plan for how much they'd realistically need. Asking for the wrong amount the first time is a mistake, and that second investment will cost you significantly more.
Related: 3 Ways to Raise Capital and Take Your Business to the Next Level
Alternative options
Numerous micro-funding organizations have popped up in the last few years. These non-bank lenders are gaining popularity, offering microloans for anything under $50,000 with a streamlined credit process. Unlike traditional loans, these microloans are designed to give small business owners a leg up without drowning them in debt, making it a smart option for entrepreneurs who only need a small amount of money to launch their businesses.
Related: What is the Federal Funds Rate and How Does it Impact Loan Rates?
Preparedness is your biggest asset
To secure funding for your business, the first step isn't to ask for money; it's to determine exactly how much you'll need. I always encourage entrepreneurs to create an expense budget that includes all their bills for one year. Whatever budget you come up with, increase that amount by 15% because you will need a cushion. Whatever you forecast in revenue, deduct 15% because you likely won't hit your revenue targets. Within that final number lies the truth of how much lending you need.
This isn't pessimistic; it's just the way that it works — you figure out what's reasonable, and then you add a safety net for everything unforeseen. We tend to overvalue our ability to create something quickly without any hiccups. By accounting for these contingencies before they crop up, you can better prepare to face them when they inevitably appear.
Plan your move wisely
Where and how you choose to obtain funding could make or break your business. Take a breath, look for advice, and try to make smart financial decisions. If the time doesn't feel right, trust your gut; no one will steal your idea overnight, so it's OK to wait. As you consider your options, look at the bigger picture, like economic stability, interest rates, and future implications, before making your move. After all, it may be the only move you have.
