Small businesses have been the source of most of the job creation in recent decades, yet, it is not easy for small businesses to find financing. Banks are cutting back on loans or requiring collateral that many start-ups do not have. Grants and venture capital are limited to high technology firms, those involved with green technologies, or some service providers such as environmental cleanup. There are still options, however. Here are proven ways to finance a small business.
This means getting the business going on your own money or with your own resources. If you already have some cash or assets, this is an ideal way to get a business started because there are no payments for interest and loans do not need to be repaid right away. Sometimes it can work out where the business generates more income than expenses, at least for a time, that allows you to repay yourself, but most often it does not work this way and the initial owner has borrowed against his other assets (like home equity) in order to finance the startup costs of a small business.
You can save money on salaries and benefits by starting with part-time staff. Then, once you have established your core business, you can hire employees that will help you grow. Growth often leads to the need for more capital, so one way to finance expansion is to increase sales faster than expenses.
Angel Investors and Venture Capitalists
Unless your business is in a high-growth sector and has the potential to be worth hundreds of millions quickly, you will probably have trouble getting funding from angel investors or venture capitalists. These sources are extremely limited in their willingness to invest in startups due to the risks involved, but they do exist and there is a real need for startups to find alternatives. This type of financing is only likely if you are trying to start a high-growth, new technology company.
As long as customers pay their bills within 30 days of receiving an invoice for goods or services purchased from your firm, trade credit is an excellent way to fund operations in a small business. This is especially helpful if your products or services are seasonal since cash flow will be steady during your busy seasons yet slow down when demand isn't as high.
Trade credit is also a good way to start your business if you are unable to obtain financing. You can offer early customers discounts in exchange for extending payment until after you receive the money from other orders, either by reducing their total bill or offering them added products at a reduced price.
Working Capital Loans
Businesses usually thrive on a steady cash flow, but when you are starting out or have a seasonal business where the influx of cash is up and down, it can be difficult to maintain that consistency. Working capital loans allow you to cover your current expenses with short-term financing until customers pay you for services rendered. These types of loans often have interest and principal payments due at a specified future date, such as 90 days after the loan is approved.
The benefit is that working capital loans do not require collateral as businesses do for equity investments or real estate to be used as collateral when applying for bank financing.
Debt: Leasing Materials and Equipment
If your assets will be machinery or equipment whose value depreciates, leases are an option for financing. When your business is small and you are just starting out, you may not have the cash needed to purchase a new piece of equipment, so leasing options often work well. This gives you time to build up capital, and eventually, you will be able to purchase your assets outright or with financing from other sources. Leases require monthly payments that include both principal and interest payments. The "rent" for these types of contracts usually increases every few years as part of the terms of the contract for the finance company.
Credit cards can be an effective way to make invoices on certain purchases such as office supplies, telephone fees, and travel expenses for business purposes among other things so long as credit cards are not used for everyday expenses like train tickets to commute to work. Of course, there is always a risk of payment default, and the interest that you have to pay on credit cards can be very high compared to other sources of financing.
One of the most important things to consider when starting a small business is how you are going to finance it. This article has provided some helpful information on financing options for entrepreneurs. The best way for you will depend on the size and scope of your company, how much money you need, what type of loan or financing would be most beneficial for you, etc. All of these methods have pros and cons, so the best thing to do is make a list of all the options that would work for you before deciding which one to go with.
Posted 1 year ago by Allen Brown