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.
This is a suitable form of financing for any business that sells goods or services and needs cash flow today, but normally collects receivables 30, 60, or 90 days. Many industries, including trucking companies, security providers, and exporters use factoring.
Factoring is simply the sale of an invoice. It is not a loan, so banks do not provide this form of financing. For more information on factoring and selling receivables, contact a reputable factoring company.
5. Home equity loans or lines of credit
If you own real estate that is worth more than you owe on it, you can borrow money against it. This is actually a mortgage, which means that in most cases, the interest you pay on the loan is deductible from your personal income taxes.
Generally, banks do not ask how you intend to use the proceeds of a home equity loan or credit line. They have obtain the real estate as collateral, so just know that a default could mean foreclosure. Any bank that offers home mortgages can provide guidance or information on real-estate loans or lines of credit. Credit and real estate valuation requirements apply.
6. Finally, there is the ‘friends and family plan’
If you have friends or relatives who are willing to finance your business idea — more power to you. There are many creative ways to find financing for your business.
Small, community-based banks may have looser requirements than bigger commercial banks, but may require all of your personal and business deposits as a condition for issuing a loan. Ultimately, where there is a will, there is a way. Be persistent and believe in your business idea, and you can win allies and possibly investors.
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