Financing your business in any economy can be daunting, regardless of whether you’re looking for start-up funds to launch your idea, capital to expand, or money to tide you over during tough times. Unfortunately, securing finance opportunities, in our current economic climate, is more difficult than ever. To help you find the money you need, we’ve compiled a list of common financing options and some less common alternatives to consider.
Get a Bank Loan
If approved for a loan, the bank will give you a specific amount of money that you are responsible for repaying on a specific schedule over a period of years.
However, beware, obtaining a loan can be difficult. Any bank’s primary priority is to get their money paid back with interest. As such, they tend to only approve loans for businesses that are viable and generate enough cash flow to comfortably make payments. To qualify, you will need to provide financial proof that your company has a proven track record of generating cash and/or has substantial assets. This can be difficult for new small businesses with limited experience.
Use a Credit Card
Using a credit card to fund your business is generally frowned upon, given the high-risk nature. If you fall behind on your payments, your personal credit score can be damaged. Similarly, if you pay on time, but only pay the minimum each month you will potentially dig yourself into a financial hole. However, if used discerningly, a credit card can get your business out of the occasional jam or provide an extension of time to pay back small vendor debts. Another benefit to credit card usage is that ability to take advantage of various business promotions or rewards the card may offer. Be careful not to overextend yourself if you decide to use a credit for business financing.
Tap into Your Savings
Saving for a while before you start business is probably the shrewdest and most risk averse way to begin your entrepreneurship. However, while ideal, extensive saving is not feasible for everyone. Additionally, the growth of your company will be slow and limited to how much money you can save from another source (i.e. a 9-5 job).
Some business owners also utilize already saved funds like a 401(k) (or other retirement savings accounts) and home equity. If fact, there are ways to roll your retirement assets into your incorporated business. The process is complicated and risky, however, so if you choose to go this route you should consult an attorney with experience in business structure and finance.
Remember that using your retirement funds or home equity, means if things don’t work out with your business, not only do you lose your business, but also your ability to retire on time and maybe even your house, too.
Crowdfunding
Crowdfunding can be an effective way to raise money for a new business or development project. With crowdfunding, you are able to set a goal for how money you need to raise over a specific period of time, for example, 10,000 in 30 days. Friends, family, fellow entrepreneurs, and anyone interested in your plan can pledge money to your cause. You can also offer incentives, like a t-shirt or discount on the finished product to encourage giving.
Keep in mind, though that crowdfunding is not intended to be long-term business financing. It is most often used for single, small scale idea production. A benefit the crowdfunding approach is you also have the opportunity to spread the word about your idea or new business.
Find an Angel Investor
Angel investors are private individuals or a group of investors who provide business financing, usually in exchange for equity in the business. One major benefit to Angel Investors is you can get a lot more than money out of the deal. Angel Investors can provide expertise, guidance, and networking opportunities to help start or grow your business. Also, forming a good relationship and displaying your business acumen can be a great reputation builder amongst a group of influential investors.
The downside is finding these Angel Investors can be difficult. You will need to be prepared with a strong business plan and viable exit strategy that maps out how investors will recover their investment and any profits should they want out.
If you plan to use an Angel Investor, it is crucial to work with an experienced attorney to guide you through the equity sale to avoid a diluted ownership stake in your own business.
Secure an SBA Loan
Loans guaranteed by the U.S. Small Business Administration have become highly sought after, especially during economic seasons when banks are issuing few loans. SBA loans are open to any small business, but there are a several requirements. The SBA also has several resources and provides technical assistance for small business owners.
Personal Loans from Family and Friends
Direct contributions from family and friends are a common way to finance a business. Remember, however, that when loved ones become creditors, you are risking their financial future and potentially jeopardizing relationships. To avoid this, you should prepare and provide formal business projections on business growth and estimate when they may see a return on their investment, just like you would for a bank or formal investor.
Also, note that once their money is at stake, family and friends can become very opinionated. They may want to be involved in your business decisions which can quickly become a problem, especially if you do not take their advice.
When deciding on the best financing method for your business you should keep several factors in mind, including, the viability of your business plan, available cash flow, how much risk and/or debt you are willing to acquire, etc. Knowing where you stand will put you in the best position to explore all available financing opportunities. Contact Capital Partners Law today for an assessment of the financial state of your business.
To learn more or speak with a knowledgeable Florida Business Attorney, contact Capital Partners Law today:
- Toll-free at (833) 7-CAPLAW
- Complete a New Client Intake Form (No obligation – an attorney will review your information and contact you to discuss your needs).
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This article is provided by Capital Partners Law for informational purposes only. It is not intended as legal advice and does not form the basis for an attorney-client relationship. If you need legal advice, please contact Capital Partners Law or another licensed attorney.