When you need small business financing, it’s important to know all your options, including whether you need short-term or long-term financing, so you can get the right funding for your business. One type of long-term funding, patient capital, could be a great choice to fund your business venture.
In this overview, you’ll learn what patient capital is, why it’s important, and how you can access it.
What is patient capital?
Patient capital is a type of funding that is designed for long-term needs. To understand the difference between short-term and long-term funding needs, let’s use personal finance as an example:
- Credit card: The most common short-term financing option is a credit card. When used correctly, a credit card helps you more accurately time your expenses with your income.
For example, if you get paid every two weeks or once a month, a credit card lets you pay your expenses throughout the month, and then once you get paid, you can use your income to pay the credit card bill. - Mortgage: The most common long-term financing is your mortgage. Your home’s value is completely out of line with your monthly or annual income. Therefore, you use long-term financing to pay for the very high costs today, and you’ll receive the benefits over a long period of time.
The concept of short-term and long-term capital is the same in the business world. Your business needs short-term capital to fund things like inventory and operating cash while waiting for your customers to pay their bills. You also need long-term capital to pay for big costs, like buildouts and start-up costs, that will create value over much longer periods of time.
Why is patient capital important?
Not all funding and capital are the same. Just like with employees and inventory, capital is a resource you must select to correctly match your business needs. If you mismatch the type of capital with how you use it, it can cause problems.
You might think that all capital – cash infusions into a business – is the same, but it’s not. Understanding the difference between short-term capital and long-term, or “patient” capital, can make a difference between your business struggling with paying back its funding, and thriving.
How can you get patient capital?
You can access patient capital from many different sources, including your equity investors and through lenders.
Equity investors
Equity investors are the most patient source of capital. This is capital given to your business in exchange for a piece of ownership. The investors’ income is tied to your business’s performance, making them more willing to wait longer to start receiving payments from you. In some cases, they are willing to accept years of zero payments while waiting to sell their stake in the business. Equity investors are suitable for:
- Research and development, especially more speculative research.
- Projects with intense spending to open or acquire market share, with little or no profitability for longer periods of time.
It’s not a good idea to use equity investors for short-term business needs. For example, if you use money from equity investors to pay for inventory, you’re trading ownership in your business for a lifetime in exchange for inventory that you’ll only need for a few months.
Conventional lenders
In general, lenders and financing are more limited for long-term projects. This is because lenders don’t participate in the income that comes from the long-term performance of your business. Instead, lenders receive their income as interest, which comes from how much money you owe them and how long that money continues to be owed.
A term loan is a financing option from lenders that’s designed for long-term capital needs. This can help your business access funding for high upfront costs that get paid off over a longer period. However, lenders generally want to see that your business’s cash flows are already at levels where you can afford to make full principal and interest payments from day one.
Alternative lenders
These financing constraints put your business in a bind, as you would need long-term financing for starting up and growth. Without having the cash flow needed to repay a long-term loan – you’re making these investments with the hope that your cash flow will eventually grow.
This is why alternative lenders out there, like community development financial institutions (CDFIs), that are regulated by the Small Business Administration (SBA). There are loan programs guaranteed by the SBA that can help you access financing for long-term projects.
A new option
As of September 2024, a new option is available for New York-based small businesses that directly target the need for “patient” capital. The Main Street Capital Loan Fund is a long-term loan that has a six-year repayment schedule. You will pay interest-only for the first year after receiving this loan, which greatly supports your cash flow.
As a result, this loan is a great tool if your business has realistic plans for building up your cash flow, but it might take just a bit longer to realize. The Main Street Capital Loan Fund takes the ideals of SBA-guaranteed loans a step further by helping with projects like:
- Slower-growing businesses starting from the ground up: Slower-growing businesses require capital to build out and open, but it can take up to two years to reach full financial vitality. Due to the longer wait for profitability, your business faces challenges in accessing capital. This loan program’s full year of interest-only payments gives your business breathing room while your cash flow builds up to a viable level.
- Expansion plans that need more time to be effective: For small businesses less than 4 years old, many investments in long-term growth can take some time to pay off. For example, if you hire a marketing agency and undergo a rebrand, it can have big effects on the market position of your business. But, this can take months or even a year to get customers to spend more.
Pursuit can help you get the financing you need
Pursuit helps small business owners in New York, New Jersey, Connecticut, Pennsylvania, Illinois, Nevada, and Washington to get the financing you need to grow your business. We offer more than 15 loan options, a business line of credit, and the Main Street Capital Loan Fund to meet your business needs and fuel your entrepreneurial dreams.
Contact us to learn more about ways we can help you make your business vision a reality.
