A FISTFUL OF DOLLARS – 5 PROVEN WAYS TO FINANCE YOUR BUSINESS
There are many ways to finance your small business or startup, and the market for small business finance is booming in 2016. Now is the best time to start and grow a small business — let’s explore five proven ways to get the business funding you need:
The traditional commercial loan is typically available to more mature companies with provable revenue and profitability, an asset base to collateralize the loan, and sustainable contractual revenue against which to measure loan coverage. Commercial credit lines are generally larger in size, with lower interest rates and longer terms, and are typically extended to companies that have large business deposit relationships with the bank.
Unfortunately, commercial lines of credit are rarely available to small businesses or startups, unless the personal credit of the owner is very strong – in which case the bank will require personal guarantees of the principals, and possibly a pledge of personal collateral or property.
Owner Credit Line
An Owner Credit Line is a very common means of financing a one or two owner business. This is the use of the business owner’s personal credit to acquire a single line of credit, or multiple lines of credit, from one or more consumer credit companies, which can then be used to finance working capital, purchase of a business or assets, or inventory or equipment.
This form of finance is a quick and easy means of financing a startup or small business. It can typically be done without the need of a business plan, business revenues, assets or other time-consuming processes. The financing is based on the business owner’s personal credit, through which small to mid-sized financing increments are obtained simultaneously from a number of consumer credit companies.
Many of these companies offer introductory rates — even 0% interest for the first year. Credit lines are an oftentimes fast and highly effective way to fund your business. Proprietors need to work with a seasoned professional when implementing this strategy, due to the complexities of working with several consumer credit providers simultaneously without harming the owner’s credit.
Companies, like Stage 1 Funding are experts in the field of owner-based small business finance.
Another very attractive form of financing a small business is accounts receivable finance. This type of finance is a favorable option for businesses who generate invoices to their customers but must wait a period of time for those invoices to be paid. Many times, customers do not pay their bills until 30 days or more. Larger companies often take 90 or even 120 days to pay their bills, utilizing the power of their brand to take advantage of “the float”.
This creates a double-edged sword for the small business owner. On the one hand, every small business owner would love to have a large company purchasing their products or services. However, having to wait for payment can put tremendous financial stress on a small business. Payroll is due every 1-2 weeks, rent is due every month, and the business owner has to draw compensation to pay personal bills as well. The owner cannot pay their bills in 90 days, so they are caught in a cash flow crunch between payables and receivables.
By utilizing invoice financing, or accounts receivable financing, the small business owner can borrow against their accounts receivable, getting their money within a matter of a few days, and then when the invoice is paid by their customer, the loan is repaid from the proceeds of the invoice. There are a number of companies that offer this type of business financing, and Stage 1 Funding has a strong team dedicated to accounts receivable. Talk to your Stage 1 financing professional to see if your business qualifies.
A business that needs new equipment to grow can look to supplement that growth through leasing or financing. Similar to leasing a car, business equipment — ranging from trucks and large equipment to computers, telephone systems and smaller assets — can be leased or financed through a number of equipment finance companies. This is a sound means of business finance, however, there are certain pitfalls to this approach. Interest rates can be very high and sometimes hidden in an equipment lease. There is typically a cash down-payment required for this type of financing, and many times the personal credit or guaranty of the business owner is required to secure equipment financing.
Furthermore, leasing or financing equipment is limited to the purchase of an actual asset and does not provide working capital or general funding for the business. Nevertheless, equipment financing can be an integral part of the overall “capital stack” of your business, particularly when used in conjunction with one of more of the other financing methods discussed in this article.
In 2012, the U.S. Congress passed the JOBS Act, a landmark legislation that opened the door to an entire new industry of small business finance. Crowdfunding is booming, and many companies are being funded through social media, digital marketing and other forms of direct marketing through public solicitation. Through crowdfunding, billions of dollars have been raised for business growth, and as time goes on, more and more business owners are turning to this public finance mechanism.
There are many types of crowdfunding, from “pre-sales” of new products, to the actual sale of stock, or through the issuance of notes or debt in your business. However, if you are considering using crowdfunding for your business, be aware that the crowdfunding industry is highly regulated by the Securities and Exchange Commission, and should only be undertaken with the assistance of legal and financial professionals.
Stage 1 Funding, through its parent company Legion Capital Corporation, owns and manages one of the most advanced crowdfunding platforms in existence. With a database of over 6 million potential investors, the Legion Funding Platform is a viable option for companies that have reached a point of maturity that financing through the public is possible.
There are many ways — some new, some old — to finance your small business. We have touched on only a few in this article, but there are others, including SBA loans, “friends and family” rounds of finance, IPO or public offering, real estate finance and others. Regardless of the direction, you decide to take your business, the bottom line is this — work with a professional who can help you identify and procure the most effective form of funding for you. The financing professionals at Stage 1 Funding have over 50 years of experience working with small business owners. Our team has helped thousands of them to start and grow their business.
Contact us today at firstname.lastname@example.org or (888) 403-FUND.
About the Author: James Byrd is the CEO of Legion Capital Corporation — a direct to market venture, crowdfunding and advisory firm specializing in small business growth and capital formation.