How To Go About Financing Your Business
Financing your business can be difficult. Aside from writing your business plan, getting your tax ID number, registering your business name, and obtaining any necessary licenses and permits, financing your business is one of the most important steps during startup. Not all of us have access to the hit TV show; Shark Tank to propose our business plan for investment capital, nor is that the best decision either.
Options To Consider For Financing Your Business
Here’s a breakdown of different realistic options when it comes to financing your business. Whether it be for startup costs or other business changes, updates, and needs. Each financing option works better or worse with particular industries and businesses. It is all about finding what you need financed. You then need to find a loan option that will work the best for that particular business need.
Personal Sources For Financing Your Business
Personal Savings – Something to consider when you plan on using your personal savings, is that there’s a chance you may lose it all if your business sinks. This can be a risky option, unless you are sitting on a big pile of savings. The reason for the big risk is because you are most likely investing in your retirement money, kids’ college savings, or money that you use for emergencies or vacation. When financing through personal credit cards, you also face the risk of high interest rates. It will be difficult to pay off the debt when you are taking a loan against a high interest rate.
Family & Friends – Borrowing money from family and friends is always an option too if you feel comfortable enough putting your relationships on the line during the business process. They always say, “don’t mix business with pleasure”…. So unless your family or friends are planning on being a business partner or investor on their own, this option isn’t always the smartest.
External Sources For Financing Your Business
Crowd Funding – Crowd funding involves obtaining small amounts of money from a large group of investors. Branching out to all your networks of family and friends can help with financing your business by collecting smaller amounts of capital from a greater base of people. Depending on the size of your network, the total lended can add up quickly.
Angel Investing – There could not be a more fitting title for this type of financing. As opposed to venture capital, angel investors usually are a one-time lender during startup. They are more interested in investing in the business owner as a person rather than the business as a whole. An angel investor wants to see the business and owner succeed. Rather than using the loan as an investment to obtain more money once the company begins making profit.
Commercial Sources For Financing Your Business
Purchase Order Financing (PO Funding) – PO funding is a short term financing option that lends money to companies looking to finance their purchase orders. The lender pays the supplier the upfront costs so that the company will be able to fulfill the order. Once the order is complete, the business then pays back the lender.
This is a great financing option for growing businesses with little access to working capital or poor cash flow. Industries this loan type works well for are usually producers, distributors, wholesalers, or resellers of manufactured products.
Accounts Receivable Financing: Factoring – Factoring is a type of Accounts Receivable financing. This form of financing is when a factor purchases a company’s accounts receivable and then receives payments directly from the customers. The company is then responsible for purchasing back any unpaid invoices after the given time period. If the factor is non-recourse, which in that case the borrower is not responsible for paying back any unpaid invoices, and the factor accepts the loss. ( More about Recourse and Non-Recourse Factoring )
Those that benefit the most from factoring are small to medium size businesses. They are typically in need of additional working capital or cash flow quickly. Markets that are great factoring targets are manufacturers, wholesalers, trucking companies, food suppliers, security companies, and the staffing industry.
Accounts Receivable Financing: Asset Based Loans – Asset based lending is another form of Accounts Receivable financing. They are better defined as a loan that is secured by collateral or assets of the business. Examples of collateral and assets generally used for the loan are inventory and accounts receivable. Asset based loans are generally used for meeting payroll or building inventory needs. If the business defaults on the loan, the lender then has the ability to seize the assets that we originally submitted as collateral.
Equipment Leasing – Equipment leasing is essentially renting machinery without ownership. The advantage to equipment leasing is that the monthly lease payments are generally lower than if you were to take out a loan to actually purchase the equipment.
Popular types of equipment that can be funded are medical equipment, construction equipment, office equipment, fitness equipment, recycling, manufacturing, restaurant equipment, trucks, machine tools, furniture and fixtures.
SBA Loans – Owner-operated, for profit, sole-proprietorship, corporation or professional partnerships are all businesses. They are all capable of applying for an SBA loan when they do not qualify for a regular business loan. SBA Loans can be attractive to businesses. These loans are generally financed as small payments over a longer period of time.
Industries that are good prospects for an SBA loan are auto repair shops, car washes, convenience stores, gas stations, dental care, education related institutions, entertainment companies, electronic manufacturers & supplies, health & fitness organizations, franchise businesses, hotels, medical, offices, retail, and transportation.
Venture Capital – Venture Capital is a form of financing that requires bringing in a business partner as a partial owner of the business. Businesses that qualify for venture capital usually have a unique product or service. They also have a solid business plan, and a well-organized management team that has experience in the industry.