Financing a new or existing business can be a challenge. Whether the money is needed for startup or to get through tough times or to expand this list should help. Here are 10 to finance a business.
Factoring is when a company sells receivables at a discounted rate for cash up-front. It is a type of financing used by companies that do not have good credit or by businesses that have to fill orders before they are paid.
However, this is an expensive way to raise money. Businesses that sell receivables usually pay a fee that is a percentage of the total amount. It a company pays a two percent fee for funds 30 days in advance that is equivalent to an annual interest rate of 24 percent. It is for this reason that companies can obtain a negative reputation over the years.
Nonetheless, according to Inc., the economic downturn has forced business to look for alternative financing ideas and they like The Receivables Exchange and are trying to make factoring more competitive. The Receivables Exchange allows companies to offer receivables to many businesses at one time, along with hedge funds, banks, and other finance companies. Lenders will bid on the invoices, which can be sold individually or as bundles.
A Bank Loan
Lending standards have become more strict, however banks such as Bank of America and J.P. Morgan have set aside additional funds to lend to small businesses.
Use a Credit Card
Using a credit card to fund a business can be risky. If the owner of the credit card falls behind on the payments their credit score will take a big hit. If just the minimum is paid monthly, it could create a hole the owner will never dig out from, however, if the credit card is used in a responsible manner, it can help the company out of the occasional jam and extend the accounts payable period to shore up cash flow.
Tap Into That 401k
For those that are unemployed and want to start their own business, the funds stored up in the 401k can be tempting. Thanks to provisions on the tax code, people can tap into those accumulated funds without incurring a penalty. But be sure to follow the correct steps. The steps are simple, but legally complex.
It is imperative to have someone who has experience setting up a C corporation and the appropriate retirement plan to roll the assets into. Investing retirement funds means if things do not work out, the business will be lost and so will the nest egg.
A crowdfunding account, like Kickstarter can be an effective and fun way to raise money for a creative project that is a low cost. Set a goal for the amount of money to be raised over a certain period of time, an example would be, $1,500 over 40 days. Family, friends, and strangers pledge to pay a certain amount of money on the site.
Kickstarter had funded more than 1,000 projects from documentary films to rock albums since it launched. This is not about long-term funding. It is supposed to facilitate the asking for and giving of support for a single idea. Generally, project-creators offer incentives for pledging, like if someone donates $15, they get a T-shirt.
There is no long-term investment for supporters. They cannot even write it off as a donation for tax purposes. Regardless, it has not stopped almost 100,000 people from donating to Kickstarter projects.
Pledge Future Earnings
Those who are ambitious and willing to bet on future earnings do not see this funding opportunity as a gamble. An example would be Kjerstin Erickson, Saul Garlick, and Jon Gosier. Using an online marketplace called the Trust Fund, they have offered a percentage of their future lifetime earnings in exchange for upfront, undesignated venture funds.
Erickson swapped six percent of her future lifetime earnings for $600,000. The other two offered three percent each of their future earnings for $300,000. Be cautious. The legality and enforce-ability of these personal investment contracts have not been established, according to Inc.
When pitching a proposal to an angel investor, all the old rules apply: be clear and brief, speak in business terms, avoid jargon, have an exit strategy. The economic turmoil of the past few years has made a complicated game tricky. Here are some tips to win over an angel investor:
- Bring someone with experience to the meeting. Having an older person on the management team eases fears about the company’s ability to handle a rocky economy. Even if the person is unpaid, the idea of a highly experienced advisor can add credibility and ease minds.
- Do not be a bad follower. Was the business started because the owner had a passion for the idea or to cash-in on the latest trend? Angels know the difference and are not easily fooled. The will not pay attention to get-rich-quick schemes.
- Know the business. Market assessments, competitive analysis, solid marketing, and sales plans are necessary when talking to an angel investor. It is important to demonstrate expert knowledge of the market no matter if the company is a startup or has been around for 20 years. It is also imperative to show the discipline to follow through.
- Keep in touch. An angel may not be interested at first, especially without the track record as a successful entrepreneur. However, that can be combatted by formulating a way to keep the angel investor in the loop on large developments, such as a major sale.
- Secure an SBA Loan
Banks can be reluctant to risk their own money in the wake of the credit crisis, however, loans guaranteed by the United States Small Business Administration have become a hot commodity.
It is worth noting that funds to support special breaks on fees and guarantees on SBA-back loans have run out multiple times. While SBA-backed loans are open to any small business, there are a number of qualifications.
- Under the law, the SBA cannot guarantee loans to companies that can gain the money needed on their own. The owner has to have applied for a loan from a bank or financial institution and have been turned down.
- The company must meet the government’s definition of a small business for the industry.
- Depending on the type of loan, there may be other criteria to meet.
- Once it is determined that the company meets all the qualifications, apply for a commercial loan from a financial institution that processes SBA loans. The SBA does not provide loans directly. The qualifications desired by the bank may be more stringent.
Raise Money Through Friends and Family
Asking for money form friends and family is the most common way to raise startup funds. However, when making loved ones creditors is risking their financial future and jeopardizing important personal relationships.
Do not approach them before forming a strong, formal business plan. Offer formal financial projections for the company and an evidence-based assessment that will show when they can plan on getting their money back. Let them know you take their money seriously.
How will the arrangement be structured? Will equity be offered? Will this be a loan? Most importantly, be honest about the risk involved. It is always best to be up front.
Apply for a Microloan
Lack of credit history, collateral, it the inability to secure a loan through a bank does not mean a loan is out of the question. One option is to apply for a microloan; a business loan that ranges from $500 to $35,000. Microloans are so small that commercial banks do not bother. Instead, go to a microlender, a non-profit organization that works differently than banks.
Microlenders offer smaller loan sizes and require less documentation than banks. Often, they have more flexible underwriting criteria as well. There are a few hundred microlenders throughout the United States and they often charge a slightly higher interest rate than banks.
Ideally, microloans are for business startups or for an entrepreneur facing a capital gap and needs to secure capital for new equipment, according to President and CEO of AEO Connie Evans. AEO represents 400 mostly non-profit microlenders and microenterprise organizations.
By Jeanette Smith
Inc.: 10 Ways to Finance Your Business
Image Courtesy of Hamza Butt’s Flickr Page – Creative Commons License