Do you have a small business that is growing fast, causing you to worry about cash flow? What if you get a large customer or contract that requires you to hire people, order inventory, or invest in equipment or property? You have heard it takes money to make money, but you don’t know how to get the money.
What are the best sources of funding, and what order should you consider your options? Since this is a large subject and I want you to read the whole article, I think it is best to split it up among multiple weeks.
Below is a list of 12 options to consider in order of my preference. I broke these into 3 levels, and I plan on going deeper into each level in future articles.
Bootstrapping is funding your business with your own savings, hard work, and reinvesting your profits back into your business. Although this method is the safest, there could be limitations if your business is growing quickly.
Pre-billing customers for services is preferable if possible. Also, negotiate vendor payable terms to be longer than your client terms. If a customer pays in less than 30 days and a vendor gives 60 days to pay, you have an extra 30 days of cash.
Leasing vehicles or equipment is helpful to conserve cash. I would suggest doing this on higher dollar fixed assets because I found that leasing lower fixed asset purchases, such as computers, does not seem to be worth it.
A bank will give you a line of credit to use if necessary, but you don’t have to use it. It is best to have this in place before you need it.
This category covers home equity loans and possibly some credit card loans that have low interest rates for a period of time. An auto loan could also be an option. Basically, you will use the personal loan cash for your business.
SBA Loans are a federally sponsored debt financing program that usually have a lower interest rate. General Small Business Loans 7(a) are the most popular.
Private Equity covers any kind of investment in which some percentage of equity is given up to an outside investor. This might happen through an Angel Investor, Private Equity Firms, Venture Capitalists, or Crowd Funding.
Although government grants are typically for non-profits, there are some available for regular for-profit companies. Also, economic development organizations can offer low interest rates when lending alongside a bank. Check out #8 on this Forbes article “The 12 Best Sources of Business Financing”.
This is debt funding that gives the lender the right to convert the debt to ownership equity if the loan is not paid back in time.
Although the interest rate is higher, there are some banks that will fund cash as a revolving line of credit based on Accounts Receivable, Inventory, or Machinery and Equipment.
Factoring is a cash funding method of the business selling the accounts receivable at a discount to a third party. Although some people may disagree with the placement of this, the key will be the amount ultimately paid to the Factor (funding source). I would run the numbers on the worse case scenario just to understand the risk.
The last option would be to max out all the credit cards you can get and then pay the exorbitant 20%+ interest. This might be the easiest option, but it is very expensive and hard to get out of debt.
I know I missed family and friends as an option. I personally think it is best NOT to consider family and friends because it could cause many issues with relationships. If everything works well, then all will be well. You have to consider what would happen if it doesn’t go well. I say avoid this option or put it in Level 3. Relationships are priceless.
I would love to hear comments on this order because I assume some of you may disagree.
What have you found to be helpful in funding your business and what would you avoid?
Have you recently started a business and you wonder how...
Do you have consistent financials that you can review each month...