Financing a business is not an easy one. Here we’ve compiled 5 techniques, including factoring, from the tried-and-true to the experimental.
Finding financing in any economic climate can be challenging, whether you’re looking for start-up funds, capital to expand or money to hold on through the tough times. But given our current state of affairs, securing funds is as tough as ever. To aid you find the money you need, here is a list of 5 financing techniques and what you should know when pursuing them.
1. Consider Factoring
Factoring is a finance method where a company sells its receivables at a discount to get cash up-front. It’s often used by companies with poor credit or by businesses such as apparel manufacturers, which have to fill orders long before they get paid. However, it’s an expensive way to raise funds. Companies selling receivables generally pay a fee that’s a percentage of the total amount. If you pay a 2 percent fee to get funds 30 days in advance, it’s equivalent to an annual interest rate of about 24 percent. For that reason, the business has gotten a bad reputation over the years. That said, the economic downturn has forced companies to look to alternative financing methods and companies like The Receivables Exchange are trying to make factoring more competitive. The exchange allows companies to offer their receivables to dozens of factoring companies at once, along with hedge funds, banks, and other finance companies. These lenders will bid on the invoices, which can be sold in a bundle or one at a time.
A message from Inc. – Looking for factoring solutions for your business? If you would like information to help you choose the one that’s right for you, use the questionnaire below to have our partner, Buyer Zone, provide you with information for free:
What type of business financing are you interested in obtaining at this time?
– Business loan.
– Cash advance against credit card income.
– Loan for equipment purchase.
– Equipment lease.
– Commercial mortgage loan.
2. Use a Credit Card
Using a credit card to fund your business is some serious risky business. Fall behind on your payment and your credit score gets whacked. Pay just the minimum each month and you could create a hole you’ll never get out of. However, used responsibly, a credit card can get you out of the occasional jam and even extend your accounts payable period to shore up your cash flow.
3. Pledge Some of Your Future Earnings
Young, ambitious and willing to make a bet on your future earnings? Consider how Kjerstin Erickson, Saul Garlick and Jon Gosier are trying to raise money. Through an online marketplace called the Thrust Fund, the three have offered up a percentage of their future lifetime earnings in exchange for upfront, undesignated venture funding. Erickson is willing to swap 6 percent of her future lifetime earnings for $600,000. The other two entrepreneurs are each offering 3 percent of future earnings for $300,000. Beware: the legality and enforceability of these “personal investment contracts” have yet to be established.
4. Attract an Angel Investor
When pitching an angel investor, all the old rules still apply: be succinct, avoid jargon, have an exit strategy. But the economic turmoil of the last few years has made a complicated game even trickier. Here are some tips to win over angel interest:
Add experience: Seeing some gray hair on your management team will help ease investors’ fears about your company’s ability to deal with a tough economy. Even an unpaid, but highly experienced adviser could add to your credibility.
Don’t be a fad-follower: Did you start your company because you are truly passionate about your idea or because you want to cash in on the latest trend? Angels can spot the difference and won’t give much attention to those whose companies are essentially get-rich-quick schemes.
Know your stuff: You’ll need market assessments, competitive analysis and solid marketing and sales plans if you expect to get anywhere with an angel. Even young companies need to demonstrate an expert knowledge of the market they are about to enter as well as the discipline to follow through with their game plan.
Keep in touch: An angel may not be interested in your business right away, especially if you don’t have a track record as a successful entrepreneur. To combat that, you should formulate a way to keep them in the loop on big developments, like a major sale.
5. Secure an SBA Loan
With banks willing to take any chances with their own money in the wake of the credit crisis, loans guaranteed by the U.S. Small Business Administration have become a hot commodity. Indeed, funds to support special breaks on fees and guarantees on SBA-backed loans have run out a number of times. And while SBA-backed loans are open to any small business, there are a number of qualifications, including:
Under law, the SBA can’t guarantee loans to businesses that can obtain the money they need on their own. So you have to apply for a loan on your own from a bank or other financial institution and be turned down.
In order to qualify as a small business, your firm needs to meet the government’s definition of a small business for your industry.
Your business may need to meet other criteria depending on the type of loan.
After determining that your business meets the qualifications, you need to apply for a commercial loan from a financial company that processes SBA loans since the SBA doesn’t provide loans directly. The bank’s qualifications can be more stringent.
