Tools and Resources > 20 Tips For Finding Money Now

20 Tips For Finding Money Now

Author: Jack Hess
Source: Columbus Enterprise Development Corporation

Money is the language of business. Capital will dance when the right kind of money is placed in the right set of hands. While the venture capital markets have really cooled down since the end of the internet boom, there are still plenty of options and creative financing techniques out there for emerging businesses.

According to Inc. Magazine, you don't have to be wealthy to launch an Inc 500 company - their list of the fastest growing companies. Half the group left the starting gate with $20,000 or less. Most, or 88%, of the CEOs reached into their own personal piggy banks for seed money, and more than a third of them turned to their cofounders for funds.

If money was tough to find in the beginning, it got easier to locate later on. Fully half the group went on to raise more than $1.1 million in additional rounds of financing. Bankers stopped laughing and started lending. Even venture capitalists were captivated. Of course, the money came at a price: although the majority of the chief executives today retain at least 50% of the equity in their companies, only about a quarter of them own the whole show.

So what options are there for you in finding money for your business? The 20 ideas listed below are ordered according to the most utilized sources of capital.

1. Dip into your personal piggy bank. It should come as no surprise that more than 80% of all money used to start a business comes from the owner's personal funds. This is true for many reasons. First, if you are not willing to take a risk on your own business then who should? Most banks require the owner(s) to place a good amount of the required funding into the business and private investors look for the same type of commitment. Second, business start-ups involve a great deal of risk and, by their design, banks and other financial lending institutions are not risk-based lenders. Therefore, funding is not usually available from these sources at this particular stage of the business so the owner has little choice. As you might imagine, your own money is the best money to start with.

2. Beg Aunt Sally. The other major source of funding comes from friends and family. Some 39% of all seed funding comes from this source. While this technique provides an excellent source of money, be careful; don't get sloppy with the formalities. Make sure you document everything especially for when your business grows and its capital structure is heavily scrutinized. Don't forget to talk to your accountant and attorney before accepting these monies. Just because they may be family doesn't mean you shouldn't go through the proper advisors.

3. Consider a partner. In many instances, the amount of capital needed far exceeds the assets of the owner. In these cases, the owner may need to bring on additional partners to raise the money. Partners can bring not only money to the venture but they can also bring complimentary skill sets and areas of expertise where you may be lacking. While this may dilute your ownership in the business, having 50% of something is always better than 100% of nothing. Many times a bank loan cannot be obtained simply because the borrower didn't have enough personal collateral to secure the loan. One way around this is to find someone with a high enough net worth or with the proper collateral to co-sign the loan. For their signature you can give them a piece of ownership in your business or other considerations. This is essentially the same process as finding a partner but the difference is that the co-signer only has to bring their signature to the table instead of hard cash.

4. Sell some personal assets. Consider selling some of your assets off to raise the needed capital. The idea here is fairly simple. Sell off some of your assets to someone you know and trust. Your friend then leases the equipment or assets back to you at a very good rate. You get a onetime capital infusion and your friend gets a tax deduction and a regular income stream.* This is a very clean way to raise capital especially among friends and family.

5. Consider scaling the project down. By their very nature, entrepreneurs are overly ambitious. If you find your personal assets a bit scarce relative to your vision, consider scaling the project down into smaller phases. By taking this approach, you can allow cash flow from the business itself to finance subsequent phases. Sometimes in order to see the path ahead, you need to get moving.

6. Leverage home equity. If you have it, you should consider leveraging the equity you have in your home. Home equity1 is one of the most widely used sources of capital for starting or growing a business. The interest rates are generally lower than commercial bank loans and yet all of the interest is tax-deductible.* Also, the principal repayments go right back into your home. For its overall cost and accessibility, this is a great source of capital that should be considered.

7. Tap into personal credit. Credit cards2 now offer an extremely attractive and widely used source of credit for starting and growing a business. The credit card is best used in small, start-up scenarios such as service-based businesses that don't require a large amount of capital. Credit card rates can be competitive to bank loans and offer flexibility on repayment. But be careful here. Having too many credit cards or even applying for multiple credit cards can harm your personal credit rating.

8. Consider a contractual sale. If you are seeking to buy an existing business, inquire with the owner if the business is available on contract. A contractual sale involves the owner providing some portion of the financing. Though the owner will still require a down payment, this sort of financing is good for several reasons. First, it shows the seller is confident about the long-term future of the business. After all, if the business isn't around, they know they might not get paid. Also, the owner may be more flexible than a conventional bank loan on rates and repayment terms if the business comes into hard times.

9. Evaluate leasing. If you find yourself requiring large amounts of equipment or fixed assets consider leasing. With leasing there are no large, up-front cash outlays and the periodic payments are tax-deductible.* In many cases, equipment suppliers also provide their own financing through banks. Be sure to inquire about such programs and financing options.

10. Leverage your customers as your credit source. If you have a good relationship with your customers, consider leveraging them as your credit source. Ask them to provide a good portion of the job upfront; at least enough to cover your immediate expenses if you can. In some cases, customers may invest in your business especially if they believe that you offer an attractive source of supply for their own business.

11. Consider bartering or trade arrangements. Many industries including media and advertising still trade services and products back and forth as a means of acquiring what they need. Think about those firms who have what you need and need what you sell.

12. Establish trade credit. Trade credit is when a vendor allows you to buy products and pay for them at a later date. Vendors offer this service to help make their products more attractive and to induce you to buy from them rather than elsewhere. Offering easy credit terms encourages sales. Keep in mind that the vendor is in business to make money. There may be a hidden cost for flexible credit terms in the form of slightly higher prices.

13. Look for microloans. Microloans are small, regional based loan pools. These revolving loan pools lend amounts of money as little as a few thousand dollars and can usually go up to amounts around $30,000. While their availability is very limited, you can begin to research these funds by calling a local Small Business Development Center or contacting your state's Department of Commerce for a listing of programs.

14. Explore commercial bank loans. About 20% of all start-up monies come from bank loan2 proceeds. While banks don't normally fund start-up businesses, they will consider deals where the borrower has good credit and where the loan involves mainly hard assets such as buildings, real estate, or equipment. Also, banks make sense if you have a good amount personal collateral to secure the loan. In many instances, a bank will ask you to pledge your house (if you have one) as collateral for the loan. If all goes well for the first few years of the business, you can normally refinance the loan and have these assets removed from the deal. Although bank loans are tough on the cash flow of your business with their regular principal and interest payments, their rates of interest are much lower than what a venture capitalist or other investor might request and with a bank loan you still retain full ownership of the business. If you obtain a bank loan, always watch out for pre-payment penalties. These fees can make it prohibitive to refinance your loan later on.

15. Consider a government loan guarantee. When you are short on collateral for a bank loan, you might consider a government loan guarantee3. The US Small Business and Administration's basic loan guarantee program is generally used to fund the varied long-term needs of small businesses. The program is designed to promote small business formation and growth by guaranteeing long-term loans to qualified firms that cannot obtain financing on reasonable terms through normal lending channels. Loans are available for many business purposes, such as real estate, expansion, working capital or inventory. Generally, SBA can guarantee up to $750,000 -- usually between 70 and 90 percent of the loan value -- at an interest rate not to exceed 2.75 percent more than the prime lending rate. Maturities are up to 10 years for working capital and up to 25 years for fixed assets. Most states offer a very similar program to the SBA's loan guarantee and you should check with your state's Department of Commerce for such programs. Keep in mind, such guarantees do not mean that you do not have to put anything on the line. In fact, you are still required to place money into the business and provide as much collateral as you personally can before the government will step in. Still these programs can help you get money where you couldn't otherwise.

16. Research state-based economic development matching programs. Many states have financing programs designed to stimulate economic development. These programs provide money or tax credits for specific activities such as employee training or investments in technology. Instead of providing full funding, however, these programs usually match funds provided from your business. Either way, these special use programs can help you to leverage your money more effectively.

17. Look into factoring and accounts receivable financing. Accounts receivables are those monies owed to you by your customers when you extend credit to them. While offering your customers credit can induce them to do business with you, it can also be a problem if they are slow to pay. After all, that's your money that's being tied up. Factoring and accounts receivable financing is basically borrowing against the money owed to you. A factoring company will normally evaluate the condition of your receivables and buy them from you. Usually, this type of financing comes at a very steep fee and should only be considered as a last case option over more immediate short-term money sources. Still, if you have a good amount of money tied up here and you find yourself in dire need, factoring might be a viable solution.

18. Search for private placements and angels. Although large venture capitalists look for bigger and bigger investments to make and for companies with the ability to grow to $100 million in sales in five to seven years, high net worth individuals or small group investors, commonly called 'Angels,' account for more capital invested in small companies than all of the venture capital funds combined. Typically, Angels invest in companies seeking between $50,000 and $1,000,000 and expect rates of return between 10 to 15 percent. Angels afford you flexibility and the ability to avoid debt, however, they usually want some ownership of your business and they expect a higher rate of return than most banks. Many states have such private investor clubs or groups. Check with your local Small Business Development Center for information about such clubs.

19. Research venture capital. Venture capital is equity funding for high-risk and high-growth companies. A high-growth company would be one that could provide a return for the venture capitalist in a three to seven year period either through the sale of the business or a public offering (stock offering). Usually, venture capitalists want to invest a minimum of $1 million; although you could ask for an amount as low as $200,000 and still find investors if you provide a strong business plan that demonstrates fast growth at a high return for the investor in the neighborhood of 30 to 50 percent. Keep in mind that a venture capitalist may require a large portion of your company's equity and will want a position on your board of directors. The venture capitalist will want a return on their investment and may exercise any of the following to that end: call back the funds, selling of the company, renegotiating the deal, etc.

20. The big money: taking your business public. Taking your business public means making your stock available for trade on a stock exchange. This is a great way to raise large amounts of capital very quickly. Preparing your company for such an activity can be a very complex process and involves the assistance of a wide array of bankers, accountants, attorneys, and other consultants. Taking a company public, through what is known as an initial public offering (IPO) is ideally suited for established businesses who are ready to make that next big growth leap that requires extensive amounts of capital. While clearly not for everyone, taking your business public can be a great financing tool for the right type of business.

* Consult a tax advisor about possible tax benefits.
1. A mortgage would be taken on your home. You could lose your home if you do not meet the obligations in your agreement with the lender.
2. All loans and lines of credit are subject to credit approval. KeyBank credit cards are issued by Elan Financial Services.
3. Key is a SBA preferred lender.

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