It’s understood you’ll chip in your own personal assets and/or credit to finance your new business – who would invest in you if you were not willing to invest in yourself? But sometimes that’s not enough.
Raising capital can be confusing and scary, but knowing the options can put you on the right path and help your new business get off to a healthy start. You can borrow money for equipment, inventory, office space or marketing, but you’ll have to bring your own strong sales and negotiating skills and tenacious commitment to your new business to the table.
Before you do anything else, make sure you have a plan!
A good idea isn’t a strong enough foundation for success, especially in today’s super-competitive economy and financial marketplace.
Your prospective business has no track record, so it’s up to you to sell your concept and ability to make it work, by:
- Thoroughly researching your prospective business model.
- Knowing why you need funds (operations or capital expenditures).
- Determining whether you need it all now or can obtain it incrementally.
- Establishing how much risk you’re willing to shoulder personally.
Here are some potential resources avenues to investigate for both debt- or equity-based funding:
Before you say, “yeah, right,” contemplate the fact that banks are looking for ways to succeed in business, just as you are. Local and regional banks in particular depend on the community’s success, so they’re more interested in yours.
Even the “big boys” are branching out to capture new opportunities to cash in on community and customer growth, with alternatives like in-house private-equity sub-groups. Traditional business loans aren’t out of the question. Or you can secure a line of credit first, to get in the door and starting building a relationship with your chosen bank. You could be just what they’re looking for.
Banks will ask you tough questions. With a well-thought-out business plan, you’ll be prepared to answer. If your new business is in an industry not typically part of your target bank’s portfolio, help them learn about your products and markets so they can best understand your company’s potential.
Micro-lenders, often non-profits, offer small, short-term loans aimed specifically at those other lenders shy away from – women, minorities, rural, low-income, economically-depressed locations.
Friends and family
Sometimes they’re excited enough to offer financial support, sometimes you have to ask. This is a common means of securing initial capital, but you don’t want to risk your business or personal relationships, so keep it professional. Document your agreement with a contract that clearly spells out loan structure and repayment requirement.
This will help cleanly avoid any possible hidden expectations, and it will head off any potential snags or loose ends when you go looking for bank or professional investment down the road.
Unsecured funding (“non-banks”)
These sources can be especially useful when you don’t have any collateral you can use as security or simply don’t want to do that. Since you won’t have any assets on the line, eligibility is based on your personal credit history and projected ability to repay. You’ll find two basic options:
- A business line of credit can assist any type of business. It offers flexibility because it’s there when you need it, so you can remain agile to capture unforeseen opportunities, expand rapidly to meet increased demand, etc. You pay only for the amount you’re using, and as you pay it off there’s more available to use for next need.
- Business loans are good for start-ups that need capital right away. Typically they’re short-term (1-5 years), and may require a co-signer. Often interest rates are higher, because the lender’s risk is considerably higher, and sometimes a lump sum payment is also required. But if you have no collateral or you’re worried about applying and being rejected for conventional loans (which can cumulatively damage your perceived credit-worthiness), this can be a viable option.
You might also check out business-plan competitions that pay cash prizes. Hey, you think it’s a good business idea, so others should, too.
Non-traditional lenders are becoming a more realistic option for more types of start-ups, so consider this:
- Angel investors often provide valuable expert guidance worth as much as the capital they provide.
- You may wind up with a partner you don’t want.
- Watch “Shark Tank” and learn from it. Potential lenders will ask you the same questions, and advice the show’s panelists dole out can be applied broadly.
- Networking is the key to finding angels.
- Prospective investors will steer you to other important resources, too.
Crowdsourcing comes from a different type of “angels” who pool resources to support a business based on your idea, business type, locality or some social benefit. You’ll usually repay these investors with products or services rather than cash.
The US Small Business Administration (SBA) and other federal agencies offer a variety of loans and grants worth investigating.
States and municipalities are actively investing in entrepreneurial businesses that can support a resurgence of economic stability and growth. Enterprise zones and other incentives can save you money, lessening immediate need for cash or capital.
Business incubators won’t loan you money, but they can provide a wealth of other resources to help any type of start-up maximize early investment.
Bootstrapping is the art of making your new business pay its own way. The amount of capital you begin with doesn’t reflect your chances of success, demonstrated by numerous well-known entrepreneurs who have built million-dollar companies from an initial investment of less than $1000.
You can even start part-time while keeping your “day job.” Bootstrapping is slower, but you won’t be starting off with a big debt.
About half of entrepreneurs finance their start-up at least in part with credit cards, both personal as well as small business credit cards. Using credit cards can be an excellent cash management tool that lets you:
- Take advantage of low interest rates and 0% introductory offers.
- Borrow short-term with a 30-day no-interest “float.”
- Save time by easily tracking and separating business and personal expenses.
- Work toward a higher credit limit to assist with higher-dollar short-terms needs that arise.
- Build business credit to support future borrowing as your business grows.
Credit cards can be especially helpful for initial expenses and smoothing fluctuating cash flow. However you should:
- Shop around for the right card to fit your needs, in terms of interest rate, potential rewards and other factors.
- Plan to pay the balance quickly, or the interest can devour your benefits.
- Recognize credit cards aren’t a wise long-term borrowing option.
Just because the economy is still edgy and hesitant doesn’t mean you can’t get financing. Understand the process of applying for and securing funding, regardless of the source, so you’re fully prepared. Look at yourself and your business through their eyes – would you invest in your start-up?
Get good legal and financial advice from professionals you trust. They’ll be important working partners as you move forward and they can keep you from making mistakes now. Read the fine print. All of it. Understand clearly and entirely what you’re signing up for, to be sure you’re choosing options that make sense not just now but as your company grows into the future.
About the Author: This is a guest contribution from Bill Hazelton, CEO & Founder of CreditCardAssist.com, an industry leading credit card comparison site. You can subscribe to his RSS feed or find him on Google+, Facebook and Twitter.