Last Updated 21 April 2017 | By:

How To Finance a Business

(10 Great Options)

How to Finance a BusinessOkay, yes it’s true, you need money to make money.

To turn your incredible business idea into reality, you need a way to finance it. But the biggest mistake when choosing how is to think traditional, like bank loans. Although bank loans are an option, there’s plenty of ways to go, even if you don’t have good credit or any cash on-hand. Maybe you’re nervous about going into debt, or maybe debt doesn’t scare you at all.

Regardless of your situation, you owe it to yourself and your business to explore the possibilities below.

Quick-Note: Financing starts with your business plan. It’s critical for you to plan first then look for funding when you know what you’re doing and what you need. That’s where LivePlan comes in, business planning software that makes it much easier to get down to specifics.

Option 1) Sell Your Assets

Financing Option 1) Sell Your Assets

This may be the easiest way to finance your new business – sell assets. Do you own a car or have equity in a home? Maybe a 401K or retirement savings account? Think about the assets you own. Countless entrepreneurs are willing to sell the majority of their worldly possessions to finance their businesses.

If you’ve taken the time to validate your idea, financing your business with your personal assets can be the easiest way to get your business off the ground.

 

Is SELLING ASSETS RIGHT FOR YOU?

Well, do you have assets you can part with? But besides the obvious answer, you also need to consider whether the asset is vital to your life and new business. Selling your house to fund your new startup is extreme – and risky. Although you’re confident your new business will be a success, don’t part with any asset you can’t live without.

Ways to Sell

Small assets can be sold on eBay or Craigslist, pawn shops, lawn sales, or auctions. If you’re trying to liquidate large assets, hire a professional to help (accountant, realtor, financial advisor, etc.). Depending on the asset, you’ll also need to know if it will impact your taxes. Plus, you may face some penalties or fees for accessing certain financial assets, like CD’s. Get the details before you decide to sell.

Option 2) Trade Credit

Financing Option 2) Trade Credit (Buy Now/Pay Later)

In a nutshell, trade credit is any time you take delivery of materials, equipment or supplies without paying cash on the spot. It’s a great system in theory, but it can be difficult to convince suppliers to offer you trade credit. They may require you to pay for every order upfront until you’ve established you can pay your bills on time. Try to speak directly with the decision-make, who may be willing to make specific arrangements or allow you to make payments over time.

This option will certainly cost more than paying cash upfront, as they’ll charge an additional fee for any trade credit situation. If you’re interested in a possible trade credit with a supplier, all you have to do is ask. The worst that can happen is they’ll say no. The best that can happen is you get your business funded today.

 

IS TRADE CREDIT RIGHT FOR YOU?

Trade credit is great for established businesses. It’s much harder for new startups (but it can be done). If you don’t pay the money back on time, you could be sued and it could impact your credit. Trade credit is only right if you have a solid business strategy that ensures the money can be paid back. That means you already have customers willing to buy, not just a list of potential leads.

WANT TO TRY A TRADE CREDIT ARRANGEMENT?

If you want to negotiate a trade credit agreement, first look at the company’s website and review their policies. Larger companies will probably have something outlined and may not be open to negotiating with an unknown business. Smaller brands may be more open, provided you’ve got a solid Business Plan to show them. Ask for a small order, pay them back on time, and then try to negotiate for a larger amount when you’ve built a relationship.

Option 3) Angel Investors

Financing Option 3) Angel Investors

Angel Investors are successful people willing to invest big bucks into ideas for a piece of the action. They’re looking for a great ROI and aren’t afraid to stick their noses into your business if they feel you’re not going in the right direction.

NBC’s show Shark Tank is a great example of Angel Investing in action. Contestants give a quick pitch/presentation and try to sell the investors on their big idea, based on numbers, projections, and strategy. In Shark Tank, profitability trumps passion. Sure, you have to be passionate about your business, but your angel investor doesn’t. They’re just looking to turn a profit/add to their income streams.

That’s not to say that Angel Investing is bad – it’s not. The process just has different parameters than other types of funding. Some specialize in the tech industry, restaurant, or manufacturing. They’re extremely knowledgeable of their industries, and can give you really good ideas and guidance with regards to product development, marketing, sales and so on.

It’s a good process for those who don’t mind giving up partial control of their business in return for financial backing.

 

IS ANGEL INVESTING RIGHT FOR YOU?

If you want 100% control of your business then Angel Investing isn’t for you. Plus, it’s not for small, micro or solo businesses. However, partnering with the right investor may be the answer if you’re comfortable receiving guidance along with your startup cash.

READY TO GET STARTED WITH ANGEL INVESTING?

Here’s a handful of resources:

Option 4) Family & Friends

Financing Option 4) Borrow from Friends & Family

This option is certainly not for everyone. But if you have friends or family willing to invest in your new business, than this can be a great option. Your friends and family love you and want you to be successful. However, there are a few pitfalls to avoid at all costs.

  • Lending money to a friend or family member is a business transaction, not a personal one so it’s crucial to put everything in writing.
  • Make it perfectly clear how much money they’re lending, and how you’re going to pay them back. Some may want a percentage of your profits.

If this is the case, stipulate that you have the right to buy them out (at twice as much as they invested, for example). The goal is to have everything written out in a professional manner.

 

IS BORROWING FROM LOVED ONES RIGHT FOR YOUR BUSINESS?

Can borrowing money from a friend or family member be a huge mistake? Yes. It can ruin or damage relationships if things go bad for a variety of reasons. Be careful choosing this option as it can be more expensive than you realize.

READY TO MAKE IT OFFICIAL?

If you’re ready to either ask for a loan or want to make it official, the first step is preparing a legal contract outlining your agreement. Either go to a local attorney, or create one using an online site like Rocket Lawyer.

Option 5) Customers

Financing Option 5) Customers

Depending on your business plan, you may be able to have potential customers pay for the launch of your new product/service. This works especially well though in service businesses. For example, let’s say you’re a web designer. You use some networking contacts to reach out to potential customers and sell them a package with at least a 50% deposit. Then, those funds are used for the launch. Simple.

 

IS LEVERAGING CLIENTS RIGHT FOR YOUR BUSINESS?

You have to be a great salesperson for this one – confident, trustworthy, and reliable. You may need personal recommendations. Plus, you’ll need something tangible to show potential clients. But for the right types of businesses, this is a great option to get started without taking on debt.

READY TO CREATE A PRESENTATION FOR POTENTIAL CLIENTS?

You can’t pull this off without having something to show any potential clients. One option is to do a handful of jobs for free. That way you’ll have pictures or tangible evidence of the work you’re capable of. You could also create a presentation, website, brochure, portfolio, etc. to highlight your services. The main point is to have proof that you’re the real deal.

Option 6) Credit Cards

Financing Option 6) Credit Cards

Some consider credit card companies legal loan sharks. You get sucked in with a good rate, and they jack it up anytime they want. Extra and hidden fees, selling debt to another company, and charging exorbitant late fees. It’s all legal. Before you turn to plastic for financing consider the risk. You can get large amount of capital quickly, but the cons is the interest alone can eat you alive.

So if you’re going to borrow money on your credit cards, plan to pay it back quickly. It can save you in a financial pinch or keep your business alive for a few months. But it’s extremely expensive in the long run. This is probably the most risky long-term option.

 

ARE CREDIT CARDS A GOOD FUNDING OPTION FOR YOUR BUSINESS?

Using credit cards is only a good funding option if you have decent credit. Those with poor credit will either be outright rejected or be subjected to ridiculously high interest rates. Using a credit card should be considered a last resort, as bank loans offer much lower interest rates. They should also not be considered if you don’t think you’ll have short-term profitability – you’ll end up in a lot of debt.

CONSIDERING CREDIT CARDS AS A FUNDING OPTION?

If you’ve exhausted every other possible funding source, and want to use your credit cards to fund your new business…check out several credit card offers to get the best possible rates! Secondly, make sure you’re able to pay more than the minimum every month. Avoid getting slammed with interest and late fees at all costs.

Option 7) Microloans

Financing Option 7) Microloans

Microbusiness lending is a relatively new phenomenon, with thousands of programs worldwide. Microfinance began in the 1970s when social entrepreneurs started lending money on a large scale to the working poor. Today, microfinance programs serve anyone unable to get a loan through mainstream banks.

There are many different types of microbusiness lending, including programs from both profit companies and nonprofits. Each will have their own specific guidelines and payment policies. Most micro lenders also require borrowers to complete business training and seminars before receiving the loan. And you’ll certainly have to develop a solid business plan. Choosing the right microlender can be challenging, so be sure to research the best one for your specific business needs.

 

ARE MICROLOANS RIGHT FOR YOU?

Microloans are generally for the self-employed or a microbusiness (0-5 employees). Microloan providers generally loan a small amount (some only provide a few hundred dollar loans), but the organizations are dedicated to providing support to microbusinesses. Some provide free classes and guidance throughout the startup process as well and can be a great resource for small businesses.

WANT TO APPLY FOR A MICROLOAN?

Check out the following resources directly to see what types of options you’d qualify for. Also, there may be some women-based microfunding options available.

Option 8) Bank Loans

Financing Option 8) Bank Loans

The bank is there to borrow money from, right? If you have superb credit, your bank may not question your loan. However, bank loans are one of the hardest loans to get. The banker you’re talking to has to believe your loan can be repaid.

Their job literally depends on making sound business decisions. If you default, it reflects badly on him or her. They don’t care about the fact that you have an amazing business idea. They just want the facts (like on Shark Tank). You’ll need a solid business plan, and possibly collateral or assets. And remember you need to pay this money back or face bankruptcy if you’re not successful.

 

IS A BANK LOAN THE RIGHT CHOICE FOR YOUR STARTUP?

Bank loans are good funding choices for anyone with good credit. You’ll probably be required to sign a personal guarantee, so it will impact your credit if you default. You’ll also need to jump through whatever hoops they require.

READY TO APPLY FOR A BANK LOAN?

Not all banks are the same and have the same requirements. Check around for the best interest rates and payback requirements, and choose wisely. Be prepared with a solid business plan and collateral!

Option 9) Social Lending

Financing Option 9) Social Lending

Social lending is internet-based funding where individuals can apply for loans from other individuals. It’s a peer-to-peer system, instead of a traditional consumer-to-business process. There are many different social lending sites, and each has it’s own unique process. Like other types of funding options, the investor is looking to make a profit.

However, there are a few non-profit lending sites, like Kiva, that connects entrepreneurs from around the world with socially conscious investors who lend for philanthropic reasons. The main thing when approaching social lending, like every other funding option, is to do a lot of research upfront. But social lending is a great option for those who have limited funding choices.

 

IS SOCIAL LENDING RIGHT FOR YOUR BUSINESS?

Depending on the site, social lending loans can be very low. Kiva loans money in $25 increments, but can lend several thousand to a business. It’s not the same as “crowd funding,” which is gifting money not loaning it. Often with crowd funding, if the project isn’t fully-funded all the money is given back to people trying to invest in the idea, product, service, or cause.

READY TO TRY SOCIAL LENDING?

Like the majority of funding options, the key is to understand the details. Check the following resources to determine whether or not it’s right for your business.

Option 10) Bootstrapping

Financing Option 10) Bootstrapping

Bootstrapping is an old phrase that means improving your situation by your own efforts – pulling yourself up by your bootstraps. It’s part DIY and part strategy. It’s finding non-traditional ways to structure your business and look for alternative funding. For example, you start extremely small and grow your business based on profits (both Apple and Microsoft were founded in a garage).

It’s choosing to buy used, or leasing equipment. It’s not about being cheap, but a mindset to choose alternative options to build your business. Another great way to bootstrap your business and raise money  is to get a part-time job in the early stages. It could be a local job in your area or freelance work online through platforms like:

  • oDesk.com
  • Elance.com
  • Fiverr.com
  • Guru.com

Just keep in mind by doing this your business will not receive as much personal attention as it may need to get off the ground. It’s very important to keep your top priorities in mind so you’re still making progress on a daily, weekly, and monthly basis. The plus side to this kind of financing is that you don’t have to go into any (or as much) debt.

 

IS BOOTSTRAPPING RIGHT FOR YOUR BUSINESS?

Bootstrapping is right for all businesses. Again, it’s not about being cheap. It’s about strategically designing your business to be cost-effective. Everyone can bootstrap, but the level of bootstrapping will vary. 

READY TO BOOTSTRAP YOUR NEW BUSINESS?

When you’re creating your business plan, even if you’re not creating a formal business plan, create it with bootstrapping in mind. There are a thousand ways to save your business time and money, and it all starts with looking at your options first. Don’t assume the traditional way of doing something is the best. See where you can streamline and avoid debt at all costs. If something isn’t completely necessary, don’t buy it.

Which Is Best For You?

Funding is one of the biggest stresses for any new business. It can be difficult to determine what funding choice is best and you don’t want to take get under too much debt. This is a big decision for your business – one that could impact you for years to come.

Take time to research every available funding source. Ask questions and make an informed decision!

Cash flow is the blood of every business. Without it, your business dies. That is why it’s critical you have a hold on personal/business finances at all times. Cash flow documents should be created and could determine whether or not you’re qualified to receive a business loan. Above all, you’ll most likely need a business plan to get through the door.

 

CASH IS KING

A balance of cash-inflow (sales of goods or services) and outflow (necessary business expenses such as marketing, employees, equipment, or business loan payments) are also important when determining fixed and variable expenses future expenses.

Fixed expenses and variable expenses are two separate financial categories but both are essential.  Fixed expenses include rent, utilities, administrative and insurance costs. While variable expenses refer to inventory, sales commissions, shipping, packaging or any costs directly associated with product or service sales.

FIND YOUR FORMULA

Business owners exploring financial options should understand that every business is different and will have specific budgeting guidelines at each stage of development.  There is no secret formula for measuring an exact amount of seed money you’ll need to get off the ground.

A good way for first timers to estimate how much seed money they’ll need is by creating a mock financial spreadsheet for the cash flow of what two months of business may look like during actual operation. Keep in mind some expenses, especially for a brand new business, will be one-time costs for things like a license fee or to pay for a building marquee sign.

You will also need to factor in ongoing costs for utilities, inventory, rent and insurance.  Try to only calculate expenses that are realistic and essential. Your startup business budget should only include the necessities.

Note: it’s very important to have a detailed and down to earth copy of your budget if you’re planning on borrowing money from a lender to cover costs during the first stages of your business (LivePlan is an excellent tool for doing so).

Borrowing startup funds is one of the most common ways first time entrepreneurs just like you get the funding they need. However, lenders are tough with their selections and getting them to say yes to even the smallest loan isn’t always easy.

DO YOUR RESEARCH!

Before you start looking for a lender, do your research on who may be the most approachable. You should also understand some of the factors a lender will use to evaluate your proposal. Banks and lenders will want to see concrete proof of your ability to pay back the loan as well as a current credit history report and a solid plan for your business.

They will also want to know if you have any equity or collateral to go toward the amount you are asking for and your experience within the industry.

It can’t be stressed enough how important it is to check your personal credit history if you’re approaching a lender. If you haven’t established a business credit history, that’s what they’ll use to determine your eligibility. Point here is, funding’s out there. Options are available. It can be done, but regardless of which you choose it’s going to take hard work and commitment. Here’s to a prosperous year ahead!