10 Ways to Finance and Start a Business
How to Finance Your Business
Obtaining a Business Loan
Identify business lenders.Debt financing is probably the most common way to finance your business. You take out a loan and agree to pay it back over a certain amount of time. The lender charges interest and makes a profit that way. The most common business lenders are the following:
- Commercial banks.If you do business with a bank, you can stop in and ask how to get a business loan.
- Small Business Administration.The SBA technically doesn’t make loans, but it will guarantee loans for small businesses. This means if you default, then the SBA will cover the loan. Whether your business qualifies as “small” will depend on your industry.
- Online lenders.Generally, online lenders have looser lending standards and won’t require that you pledge collateral. However, you’ll need to make sure the lender is reputable by checking with the Better Business Bureau and a local consumer protection agency.
Gather necessary paperwork.A lender will need to analyze your business’ finances before extending a loan. Collect the following paperwork, which most lenders require:
- resumes for all owners and managers
- business plan
- personal and business tax returns for the past three years
- personal and business credit reports
- personal and business bank statements
- accounts receivable and accounts payable
- business licenses
- articles of incorporation or organization
- commercial leases
Update your financial reports.You’ll also need to submit financial reports to most lenders. Make sure you have created the following and that the information is updated:
Review your credit history.Unless your business is established, a bank won’t lend to the business. Instead, they will lend based on your personal credit history. Review your credit history and clean up any errors before applying for loans.
- Common errors include inaccurate balances, wrong credit limits, and accounts listed inaccurately as in default or collections.
- Dispute errors online or by writing a letter to the credit bureau that has the error. The Federal Trade Commission has a sample letter you can use.
Find collateral to pledge.It might be easier to get a secured loan that is backed up with assets pledged as collateral. If you default on the loan, then your lender can seize the assets. Because of this added protection, banks might require collateral if you don’t have an established credit history.
- You can pledge a variety of assets as collateral. For example, you can pledge your vehicle, home, equipment, or other assets. Talk to banks about their specific requirements.
- Fully document the condition and value of your collateral.For example, you may need to have your collateral appraised.
Compare loans.After you submit an application, the lender should decide whether to approve you. Generally, it takes two to four weeks to hear back.If you applied to more than one lender, then you should compare the loan details:
- Interest rate. Find out what percent will be charged annually on the loan.
- Fees. You may have to pay an origination fee or other fees. Read the fine print to find out the fees charged.
- Prepayment penalty. If you want to pay off your loan early, then some lenders might hit you with a fee for the privilege.
- Length of repayment. Check how long you have to repay the loan. Generally, the longer the loan, the less you will pay each month. However, the total amount you pay will be higher.
Submit your application.Provide all requested information and double check that it is accurate. If you have questions, contact the lending officer you have been working with. Submit your application with all supporting documentation and keep a copy for your records.
Identify who to target as investors.You can sell ownership shares in your business to raise money. Begin by identifying who you are targeting. Investors come in different shapes and sizes.
- Partners.You might want to bring on a partner. If so, you can convert your sole proprietorship into a partnership. Ideally, your partner should bring skills that you need, such as experience with sales, marketing, or product development.
- General public.Public companies sell shares to the general public. If you are interested in this approach, you should meet with a securities lawyer to discuss your options. “Going public” is a lengthy process and requires filing many forms with the Securities and Exchange Commission.
- Wealthy individuals.Often called “angel investors,” many wealthy individuals will invest in start-up businesses. In exchange, the investor seeks a place on the business’ board or involvement in the day-to-day affairs.
- Venture capital firms.Some investors choose to work through venture capital firms, which research companies and choose which ones to invest in. This is an active form of investment. The firm will want decision-making power in your business in exchange for investing. However, they also work closely to help you grow the business.
Search for investors.It’s not easy to find investors who might be interested in your business. Some investors only pursue opportunities in particular industries, and some require that you have raised six figures on your own before they will look at you. Nevertheless, you can get the ball rolling by searching for potential investors in the following ways:
- Look online. Search for “investor” and your industry. Visit their websites to find more about the kinds of companies that they invest in.
- Contact your local Chamber of Commerce. Your local business community might have leads they can give you. Also, your local Small Business Development Center might know local investors.
- Search the SBIC directory. The SBA runs the Small Business Investment Company program and licenses private investment funds. You can find the directory here: .
- Use a business capital broker. These brokers have networks of potential investors they can match you to. You can find a business capital broker by talking to your accountant or lawyer.
Create a winning presentation.Your business plan will be the backbone of your presentation. Investors will want to see that you have an attractive product or service and are well-positioned for growth. However, a compelling presentation will need to go beyond your business plan.
- Be sure you can summarize your business in one sentence.This is a challenge, but it will force you to identify what is unique about your business.
- Research your investors. Strive to create a personal connection with the investor within the first few minutes.
- Show your product or service. If you create products, bring a sample to show the investor. If you provide services, then create a short video that shows what you do. You want to make sure the investor can actually see your business in action.
Go through due diligence.Potential investors thoroughly vet any company they are considering supporting. Accordingly, you’ll go through a due diligence process where the investor will look in detail at your product, services, market, and management team.
- If they like what they see, they will create a sheet describing the terms and conditions of their investment.
- Depending on the amount of the potential investment, you should consider working with a lawyer during the due diligence process.
Using Other Options
Seek purchase order funding.If you resell goods, then you might need a loan to pay your suppliers. In particular, a large order might require that you make additional investments in your company. With purchase order funding, the finance company will pay the supplier directly.
- This type of financing works only if your markup is sufficiently large. You’ll need a gross profit margin of at least 30%.
- You can contact a financing company about this type of funding.
Get an advance against your invoices.“Factoring” is a funding technique where you get an advance against your invoices. If your clients are slow to pay, then factoring can provide you with the cash you need. You may immediately get around 80% of the invoice value. When your client finally pays, you get the remainder less any fee charged.
- You’ll only qualify if your clients have good credit. For example, government or reputable commercial clients are best.
- Perform your research before working with a factoring company. Ask if they work with businesses of your size and ask about their experience. Also check if they have a minimum that you must factor.
Ask friends or family for a loan.People who know you can also lend money to finance your business.This is probably an ideal option if you are borrowing a small amount of money.
- Approach family with the seriousness that you would a bank. Explain why you need the money and how you intend to pay it back.
- Consider paying your lender interest. This will also show that you are serious and not looking for extra money to spend on luxuries.
- Write up a promissory note and sign it. This will bind you contractually to paying back the money.
Withdraw money from your retirement account.You can finance a start-up or an existing business by using your IRA or a prior employer’s 401(k) account. You have to roll over your current funds into a retirement plan created for the business. The plan then uses the proceeds to buy stock in the corporation.
- This is a complicated procedure, and you should hire a financing firm to help you with the process. Check how much the company charges and whether they charge a monthly advisory fee.
- Also think carefully before using your retirement savings to finance your business. You had earmarked this money to support you when you retire. If your business folds, then you’ll lose these savings.
Use a credit card.Depending on how much money you need, you might use a credit card.Credit cards are a good option if you can get an introductory 0% rate for 12 months or more. Remember the following tips for credit cards:
- Make sure to get a business credit card. You want to keep your business and personal expenses separate. If you commingle them, then it looks like your business isn’t really a separate entity, which could hurt you if your business is structured as an LLC or corporation.
- Use the card wisely. It’s probably not a great idea to use the credit card for big purchases, like equipment. Instead, seek an equipment loan. Use your credit card instead for short-term financing, such as to pay travel expenses.
Raise money through crowdfunding.You can get funding for one-off ideas, such as writing a screenplay or financing the creation of a rap album.You create an account with a crowdfunding site, and people who visit the site can donate to your project.
- Crowdfunding is only for small, discrete projects, not long-term financing for a continuing business.
- Common crowdfunding sites include Indiegogo, RocketHub, and Peerbackers.Visit these sites and read up on their terms and conditions.
Take a home equity loan.Your home may be the largest asset you own. Accordingly, banks will lend to you if you use your home as collateral. You can get an equity loan or a home equity line of credit (HELOC), which you can use to fund your business.
- With a home equity loan, you get a lump sum and pay it off in equal monthly installments. By contrast, a HELOC acts like a credit card. You use what you need up to a limit and then pay it back.
- Talk to a lender about the terms and conditions of taking a home equity loan or a HELOC. Compare interest rates and how much time you’ll have to pay off the loan.
- Using your home as collateral shouldn’t be your first option. If your business fails, then you will lose your home.
Search for grants.You might be able to get a grant from the federal, state, or local government. Some non-profits also provide grants to businesses.Grants are often given to support emerging technologies and are typically reserved for specialized businesses. Grants are not a good option for most businesses.
- However, if you think you might qualify, then check your local business development office to see what is available.
- You can also use the BusinessUSA Financing Tool, which is available here: .
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- Franchises have additional funding options. For example, the franchisor may be willing to lend you money. You should ask franchisors whether they extend funding to potential franchisees.
Video: The Best Way To Finance Your Small Business Expansion | Forbes
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Date: 16.12.2018, 17:36 / Views: 74444