Congratulations on starting a new business! Whether you have just finalized the business idea or created a legal entity such as an LLC or corporation, you know by now that entrepreneurship does not come free or cheap. For many entrepreneurs, the most daunting part of business ownership is raising capital until you have sufficient sales revenue to reinvest.
I have heard it said, in jest, that in order to figure out your true startup costs, you should meticulously and accurately forecast and add up all your costs. Got a figure? Good. Now triple it!
Raising Startup Capital
In the early stages of entrepreneurship (unless you have very low overhead) never expect revenue to remotely cover costs. In lieu of this, many would-be entrepreneurs turn to raising capital, but find it difficult to locate people to finance their dreams.
Angel investors and venture capitalists, if interested, will not finance your startup without a large (and possibly controlling) stake in your business. If you want to secure a credit line for your business, I’ll save you some research:
For a $25,000 credit line, a bank will likely require two years of operating history, sound business credit, and prior year revenue of at least $250,000. In other words, do not expect banks to provide small business loans for your early-stage startup.
That is the discouraging news. The good news is this: there are many ways to finance your startup. Here are six options — you may not have considered — available to small business owners:
1. Small Business Administration (SBA) loans.
The SBA is a U.S. Government agency that acts to further the interests of small businesses. SBA loans are not direct loans from the government, but the SBA instead guarantees a portion of the loan to the business, while a bank lends the money. SBA loans are available in very limited circumstances to startups (such as qualified military veterans).
To find out more, visit a bank of your choice and ask for an SBA-qualified loan officer. Be prepared to submit extensive documentation to demonstrate your ability to repay the business loan. The small business banker will guide you through the process.
2. Loans or credit lines backed by stocks or bonds.
If you own shares of stock in large, well-known companies, your brokerage may be able to issue you a credit line while holding shares as collateral. This also includes treasury, municipal, or high-quality corporate bonds.
If the brokerage has the bonds, for example, you may be able to borrow up to 90 percent of the value of the bond, at excellent rates, and sometimes without a credit check. Your best source for advice on this is a licensed financial advisor or private banker.
3. Loan secured by a life insurance policy.
If your life insurance policy has cash value, you may be able to assign the cash value to a lender as collateral for a loan. The death benefit is reduced by the amount of the loan until it is repaid. A licensed life insurance agent can work with your bank to do this for you, and most banks actually employ licensed insurance agents and financial advisors.
If you do business with a large, credit worthy customer, but are paid under terms of 30 or more days, you can sell your invoice to a factoring company and get paid immediately. The factor may pay you some percentage of the invoice — i.e. 96 or 97 percent plus a small factoring fee.
The factoring company then owns your invoice and collects the money from your customer. The factoring company is not concerned with your credit score or how long you have been in business. They check the credit of your customer.
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