When it comes to financing your business venture, you don’t have to take a one-size-fits-all approach. While some types of financing, such as business loans or venture capital, get a lot of media attention, they represent only two of several potential sources of capital for your company. It’s advantageous to examine a variety of opportunities and identify those that are the best fit for your company or project. Take into account your company’s history and performance, your knowledge base, previous financing, debt and cash flow, and exit strategy, among other factors.
Here is a list of some of the most common ways entrepreneurs secure funding, either for start-ups or expansion of existing businesses:
1. Personal Savings
You may be surprised to even see this on the list, but too often would-be entrepreneurs don’t give enough thought to setting aside personal funds before wanting to jump into a business launch. Others may have plenty of money sitting in the bank, but they don’t want to use it to fund their new venture. Yet, they fully expect outsiders to do so. Few investors will consider funding a company or business venture if the entrepreneur isn’t willing to have any skin in the game.
2. Personal Lines of Credit
If retaining complete ownership and control of your enterprise is of great importance to you, you may want to attempt to qualify for a secured personal credit line based on your personal credit worthiness. Some ventures have even been launched using nothing more than a credit card. Just be sure you are confident about being able to make at least the minimum payments as you get your company or project off the ground.
3. Family and Friends
Your inner circle should include people who believe in you without first wanting to see if your idea is successful with real live customers, revenue and assets. Among these family and friends, there could be some in position to invest. If you are able to go this route, do not become lax about the terms just because your investors are people you know well or are related to. All commitments should be in writing as promissory notes, or bridge loans, which convert equity at a rate determined by later investors.
4. Peer-to-Peer Lending
While it’s possible this may seem like a new option, it is actually not a new concept and has been around for years, often in the form of small business groups that seek to support common efforts. Your best bet is to identify a successful serial entrepreneur willing to fund a promising new idea.
The Internet has opened up opportunities for crowds of like-minded folks, typically with small amounts of capital each, to back the efforts of business opportunities. While it began primarily with nonprofits, the JOBS Act opened the gates for making small equity investments in a variety of circumstances.
A bit of research online will help you identify a host of nonprofits and private companies willing to offer small loans—typically up to about $35,000—to promote small business growth by financing of individuals who may not otherwise qualify for bank financing. You may even find lenders who specialize in your industry or entrepreneurs of certain background, ethnicity or gender.
7. Vendor Financing
This type of financing is often overlooked as an option. It is actually just a way of extending the normal 30-day payment terms. Instead, manufacturers and distributors agree to defer payment for periods of a few months or even longer, until the finished goods can be sold by you. Terms will depend on your credit worthiness and what you are willing to pay in extra fees.
8. Purchase Order Financing
Purchase order financing companies help small businesses to meet one of the most common challenges: the ability to accept a large new order when there isn’t enough cash available to build and deliver the products. A PO financing company will advance required funds directly to the supplier so that the transaction can take place and the startup or new venture can realize the profits.
9. Factoring Accounts Receivable
If yours is a high-volume startup hoping to scale up, you may want to consider going this route, which is similar in concept to PO financing. But instead of advancing for production purposes, the advance is applied to unpaid amounts that are not yet due or collected from clients. The benefit is that cash is provided on sales immediately rather than waiting for 30 to 60 days or longer to receive payment. It is not unlike personal loans often promoted by banks in the springtime based on a customer’s anticipated tax refund.
10. IRA Financing
Investment Retirement Account funds, as well as 401(k)s, are some of the most accessible alternative funding sources available today for new business ventures and startups. But the process can be risky, and very costly, f you don’t know what you’re doing. It’s best to engage the help of a financial planner or other third-party retirement-plan expert who will set up a C corporation and establish a corporate retirement account. This will enable you to roll outside retirement funds into the corporate plan and invest that money in the company’s stock. Essentially, you are buying share of your own business.
If you are under age 59 1/2, and make a wrong step, you are looking at hefty taxes on top of early-withdrawal penalties, so this is typically not a do-it-yourself venture. You would also probably be surprised how many other people may be willing and able to loan you money from their accounts, if you can offer agreeable terms and they believe in your idea or if you have an asset behind your financing.
11. Angel and Venture Capital Investors.
For new entrepreneurs, these sources are not as likely to become a source of financing since most will be looking to lessen their risks with a proven business model, established revenues and an existing customer base, all waiting to scale up. Keep in mind, however, that even if you are new to the business world, it is possible to catch an investor’s attention with a very creative idea and sound business plan.