So, you’ve got this wonderful idea for a business but it takes more money than you have to get it started. You’ve been to the banks, but they either tell you the amount you need is too small for them or they talk about how big a risk they’ll be taking if they lend you the money. Either way, you don’t get the money. Now what? Here are a dozen places you can explore to finance a business:
• Bank loan: Almost impossible for a small startup business to obtain. Banks like to lend amounts over $100,000, with many setting $500,000 as a minimum, and they want to see big bucks in accounts receivable coming in to pay off the loan. If you don’t have these factors, forget financing a business with a bank loan; you’re not going to get a regular bank loan no matter how great your mousetrap is.
• SBA-backed bank loan: An alternative to a standard bank loan is a Small Business Administration-backed loan. Amounts from $150,000 to $750,000 are backed by the SBA up to 90 percent, making this kind of a loan very attractive to your bank. If you’ve heard of the paperwork reduction act, be forewarned it hasn’t hit the SBA. Be prepared to spend a lot of time filling out forms and answering questions. The experience borders on humiliation, so don’t wear your feelings on your sleeve.
• SBA-backed micro-loan: Still another SBA program offers seed money for financing small businesses. If you need from $250 to $25,000, ask your local SBA for the name, address and phone number of a micro-loan agency. This is a very user-friendly program that really tries to help entrepreneurs get their projects off and running. You will often articipate in a stepped loan, meaning you borrow a little, pay it back; borrow more, pay that back and so on. You may have to put your name on a waiting list as there are a lot of people with great ideas lined up for money to finance their business ideas.
• Supplier cash: If you are already in business, you might talk to your major supplier. You wouldn’t think they would lend you money in addition to extending credit, but many supply firms see it as good business to help their users. They think of it as buying customer loyalty and will demand this loyalty from you for their money. If you have an order in hand from a large customer, you can negotiate for really big bucks.
• Customer cash: There are several possibilities to finance a business with customer cash, one of which is pre-payment. If you need cash to fulfill a large order, your customer may pre-pay all or a portion of their contract order to lock-in prices. Another idea for consultants is to request quarterly advance payments for specific services at a reduced price. You get the money you need, the customer gets the service or product at a reduced price, and you both win.
• Borrow from your home: There are companies out there who will lend you up to 100 percent on the equity in your home. They also charge an arm and a leg in interest. Before going to these agencies to finance a business of your own, check with your bank or S&L; you may find they have more friendly interest rates. You may be limited to 80 to 90 percent of your equity, but it will be at interest rates you can live and grow with. Understand, if you default on this loan they can literally sell your home out from under you, so use with caution!
• Borrow from your 401K plan: This hinges on you still working for a firm that has a 401K retirement plan. Most of these plans have options to lend you your own money at a very low interest rate and with excellent repayment terms. You can borrow up to $50,000 or 50 percent of what is in your plan, whichever is smaller. As an alternative, you might consider financing a business by cashing in your retirement plan from your previous employment. You can cash in the whole amount or just part – it’s your money – but be prepared to immediately pay income taxes plus the 10 percent penalty on what you withdraw early.
• Borrow from your credit cards: Danger! You’ll be charged from 16 to 22 percent interest on any credit card money, and they are not nice about repayment. You can borrow a lot more than your credit limit, so don’t let that amount be a decision maker. If you’re pretty good about making regular payments, you could borrow from $5,000 to $100,000, depending on your net worth.
• Sell stock: Form a corporation and sell stock. Depending on your business idea, you could attract really big bucks. This is a very attractive way to start and finance small business needing under $1 million. But remember, your stockholders have a say in how you run the business. If you are looking for lots of money, hire an attorney and a CPA.
One nice thing about selling stock: you don’t have to pay back the money.
• Friends and relatives: Use this method for amounts under $25,000. You can negotiate long-term payment plans, low interest and maybe a partnership agreement. One of the problems with these loans is your lender’s position could change and he or she might demand their money back without some form of agreement. You should use an attorney to help you draft any notes, agreements or the like.
• Other sources: There are other sources you can use to finance big business, but small businesses have only one other, and that’s a financial angel. An angel is someone with money and, maybe, experience in your business that wants to get back into the swing of things but doesn’t want to own the company.