Finance for Startups
Around the United States, thousands of people think about starting their company. Every year, they come up with new business plans with the hope that they will be able to achieve their goals and make a reputable name. While their business idea may be different, each one of these people have one thing in common, that is how to raise money to finance their small, and growing business to help lift it off the ground and cover all their future corporate expenses. At such times, most people consider the idea of opting for small business loan but rest assured, there are many other options, and we would like to discuss them with you.
Yes, finding financing in today’s ever-changing climate could be a challenge, regardless of whether you are searching for capital or startup funds to expand or hold you through the tough times to come. Given the current state of affairs, it is nothing new that securing funds is tough. To help you with your financing needs, here are 8 financing planning tips you should know as well as how you can pursue them.
One of the easiest ways, perhaps, to finance a startup business is to consider using your own money. In an ideal world, you would want to save your money first for some time and then use up this money to fund your business. Probably, you should start up a business through this wisest, safest, and most conservative way. However, an obvious problem with such financing is they have limits by the amount you end up saving.
Sometimes, entrepreneurs also take up this step further and they take money out of their homes, maybe through the line of credit or a home equity), their insurance policies, or their retirement plans and use the funds to run their business. Keep in mind that this is a risky strategy and if the business ends up failing in the first five years, the odds will stack against you.
2. Small Business Loans
Keep in mind that you have many ways you can approach and secure a business loan. Usually, the SBA (Small business Administration) offers various loan programs with unique designs to accommodate different needs. Note that another option is to approach this loan through banks or private lenders through the help of experts. It is advisable that you take your time and explore all your options before you commit to one path.
The SBA offers different loan programs for businesses, such as disaster loans, microloan, equipment loans, or real estate loans. The most common small business loan they offer is the 7(a) loan, along with financial assistance for businesses that meet up with specific requirements.
3. Consider Factoring
In finance, factoring is a method where the company sells all its receivables at a discount rate to get some cash up-front. Often, companies with poor credit use this method. However, it may pose to be an expensive way to raise the funds. The companies that sell their receivables generally pay some amount of fee, which is the percentage of the total amount. If you decide to pay about 2% fee to get your funds in 30 days in advance, it is equivalent to an interest rate of 24%.
4. Credit Card
When using a credit card for financing your startup business, this can be a risky job. You may end up falling way behind on payments, and it could be that your credit score whacks up. You will end up paying just a minimum every month and this could make a hole that you will never be able to get out of unless you use the card responsibly. When you use the card right, you get out of the temporary jam and extend the accounts payable time to meet up with your cash flow.
5. Family and Friends
So many entrepreneurs think of funding their small businesses through the help of family and friends to invest in them. You could ask your family and friends to help with an equity investment, which effects selling them as a part of your company, or you could, ask them for some business loan. Often, people face two problems when they use family and friends as a source to finance their startup business. The first is that in the event of the business failing, you may risk affecting your relationship. The second problem often is that you will gain a business partner, even if you do not want one.
6. Angel Investors
You can consider angel investors, who are small groups or private individuals who invest in businesses, in most cases, by making an equity-based purchase. They could provide expertise, money and offer guidance to help grow and start a business. Keep in mind that getting an angel investment may seem difficult since the investors first want to see your business growth potential as well as a viable plan for the business with a reasonable exit strategy. Note that an exit strategy is often a liquidity event, which allows the investors to recover their investment and take out their profits. Note that most angel investments keep a period of about 3-5 years.
7. Purchase Order Funding
Similar to receivable factoring, this specialized form of funding continues to gain rapid popularity through the years. It has specific designs that help small businesses that resell their goods get some markup and need some funds to pay up their suppliers. Your finance company pays up your supplier directly, allowing you to fulfill larger orders. This solution is quite effective for small companies that receive large orders and they need extra funds to cover up supplier-based costs. Given the qualification and cost parameters, this works best for transactions that have higher margins and do not require any product customization.
8. Consider a Microloan
Note that a lack of collateral, credit history or the inability to secure a loan through a bank doesn’t mean that no one will lend you the money. Another option is to consider applying for a microloan; usually, these are small business loans that range from about $500 to $35,000. These loans are quite small, making it difficult to approach commercial banks. Rather, you need to turn to micro lenders or non-profit organizations that work quite differently from other banks. These lenders offer small size business loans, with the need for less documentation compared to banks.
Financing your startup business does not have to be a difficult task, you should take your time to explore your options, and evaluate how different means could benefit your small business.
In India there are govt. Subsidized loan schemes apart from what you said for financing small business but 90% startup fails because they are unable to keep up with operating cash flow.
Thanks @Rajendra for your views.
Yes, I can say that factoring is definitely a great financing solution for a business. I been using factoring for 2 years already and I find it really helpful for solving my pending invoices and working capital issues. Thanks for sharing this article.
Yes, I think that factoring is really great. I use this for my business and it really help me achieve a positive cashflow and working capital. Thanks for sharing this article.
I believe that cash is very important for the business. I think that we should really know how to fund it. All the financing solution that you shared here are all very helpful. Thanks for sharing these great solutions. I think that factoring is really great!
It is very important that business would never be out of cash. I think that it is necessary that business owners different kinds of financing strategy for their business. This article is very informative.Thanks for sharing this article!
I have a small business and I think that money is very important in order to keep it operating. I believe that loans and factoring are great ways to fund a business. Thanks for sharing this article.
Funding the business is very important. I think that if we consider factoring, we can definitely have an instant cash for the business. Thanks for sharing this article.This is a very helpful article.
Thanks for the wonderful tips. It is very much helpful to me for my small business finances. Thanks a lot for sharing.
It is the usual practice of the businessmen to buy raw material, store and spares on credit. Such transactions result in increasing accounts payable of the business which are to be paid after a certain time period. Goods are sold on cash and payment is made after 30, 60, or 90 days. This allows some freedom to businessmen in meeting financial difficulties.