You want options to finance your business, right?
Which comes first, the business idea or the capital? Often it is the idea. This leaves you, the entrepreneur, searching for creative ways to finance your business. For new entrepreneurs, it can be a little difficult – let’s be honest, nearly impossible – to get a bank loan without any business history. Also, the Small Business Administration (SBA) loans are getting more competitive. Never fear. There are a number of other options for getting your business funded.
Online lending services
These are becoming more and more popular, and they are usually quick to get. Look at Prosper, Lending Club, and Kabbage for ideas.
Factoring (invoice advances)
Factoring is when your business sells its accounts receivable to improve cash flow. This is a great way to get cash immediately into your business. This is a great option for businesses with long accounts receivable cycles.
This is when you start selling your product before you are ready to ship generally. This is a lot more difficult if you are selling a physical product. I have seen some pretty upset customers on Kickstarter when the product they have already paid for would ship late.
Pre-selling software is less risky. The worst case scenario you can refund all those customers you have pre-sold.
Pre-selling is also a great way to validate your business idea. If people are not buying you are making something they don’t want.
Friends and family
What sort of lender has low to no interest, and probably no contract? Friends and family. While it may feel like an uncomfortable option, for some this may work well. It is important to keep communicating with the lender about how your business is going. That way you reduce the risk of damaging the relationship. Before you take money from a friend or family member, think about what will happen if you can’t pay them back.
Business on the side
You can start a small side business that needs little capital. Then you can use those profits to fund your dream business. The other option is to keep your job while you work on your entrepreneurial venture. Many service businesses such as web designers have built successful SaaS products. While they have built their SaaS business, their service business paid the bills.
Home equity loan
Another one of the creative ways to finance your business is a home equity loan. Equity is the value of your home minus what you owe. If you have equity, you may be able to get a loan. These can be very risky, however. If your business fails, you may also lose your house.
You may have something, such as a car or boat, that you could sell. Selling unwanted assets is also a great way to simplify your life.
Millions of businesses have been funded with personal credit cards. You can apply for a business credit card at the time you open a business bank account. The payments tend to be low so that you can pay the money back slowly. A good strategy is to shop around to see which bank will give you a business credit card before you open an account. If you have multiple cards you can look into getting a credit card consolidation loan so that you are only making one payment.
Are you OK with giving away part of your business? Angel investors have helped many large companies get their start. Angels are very early stage investors, usually at the idea stage. They typically expect about a 20 to 25 percent return on their investment and the relationship is often a good one as they choose to invest as a means to help.
Unlike angel investors, you need to have more than a business idea to catch the eye of a venture capitalist (VC). They are interested in fast-growth companies and usually expect their return within five years. Venture capitalists also take a part of your business. They usually make much more significant investments than angels. It is not unusual for a VC to invest millions into a start-up.
Cashing out your 401K
Sometimes your only option is to finance your business with your 401K plan. You definitely want to consult a professional, to make sure you do this right. There are specific steps to funding your business with your 401K, and you want to make sure that you do it right. Talk with a tax attorney or a CPA to get it rolling.
Winning a contest
There are occasional business-based contests, such as a business plan contest, that could be worth your entry. Not only could winnings provide you with a little capital, but you might also gain business insights from those who run the contest.
Renting out your home
If you live in a popular tourist destination, such as Los Angeles, San Diego, New York, or any other major metropolitan area, there is a possibility you could rent out your home in order to earn some cash. Check out Airbnb for ideas.
Kickstarter is well known now, and many sites have followed suit. Using these sites lets you get a little money from a lot of people rather than looking for one investor who has a lot of money to give. If people believe in your product or service, customers will contribute. The great advantage of crowdfunding is that you don’t have to give away equity.
Some fields such as science may allow you to apply for a government grant such as SBIR. Your product or service does need to meet specific criteria, however. Usually, these come in the form of federal research and development goals.
Even with all these creative ways to finance your business, it is important to tread with caution. Getting a large sum of money can make you complacent about money management. Be careful to have a plan in place.
You can fund your business yourself by starting on a shoestring. This is known as bootstrapping. This gives you more control without investors breathing down your neck for their returns. But it also means that you will not get their valuable insights. It also means that you will have to grow your business at a slower rate. The decision is yours.