When starting a business, one of the most important things you need is money. Money makes the world go round right? Unfortunately, it’s not easy to come by as a new business owner. Banks don’t like to lend to new business owners because the risk is too high. Which make sense because the number of new businesses that make it past their first year is is less than 30%. When you look at the reasons why these businesses failed it’s often tied to money or the lack of cash flow. So it’s important that you start your business with more than enough money to grow it rather than trying to bootstrap and hope it all works out.
The first thing you should do when deciding which funding source is right for your business is to calculate exactly how much you’ll need to launch and run your business without affecting your personal finances then multiple it by two.
Next, you need to create your business profile. A business profile will help you quickly and easily determine whether you qualify for a particular source of business funding. For example, I work with a few Canadian businesses that don’t qualify for a number of US business loans. A business profile is simple to complete by answering the following questions.
- Where are you based?
- How long have you been in business?
- How is your business registered? Are you a sole proprietor or an LLC (in the U.S.) or company (in Australia)?
- Will you accept credit cards?
- Are you online or do you have a store front?
- Do you have a business address or are you a home based business?
- What is your monthly revenue?
- How many employees do you have?
- What industry are you in?
- Do you have a business checking account?
Now that you’ve created your profile you’ll be able to see if you qualify for the following funding sources or know what steps you need to complete in order to qualify.
Business Credit Cards.
Business credit cards are a fast and easy way to access cash for business. You can use the money for any purpose, and you can be approved for business credit with no personal guaranty or credit check. Many merchants will approve you for individual credit cards of $10,000 or higher.
Angel Investors have been responsible for funding over 30,000 small businesses each and every year. With over 250,000 active angels in just the U.S. you may want to consider an angel investor network to simplify your search. These investors are a great source of funding when banks won’t approve you, and perfect for projects where you need a lot of money.
Asset Based Funding.
Asset based funding is perfect if your company has collateral such as accounts receivable, inventory, equipment, purchase orders, or real estate. These assets can be used to secure the financing you need, and you can secure asset based funding even if your credit isn’t very good.
Bank loans are still available, although they have become harder to get approved for. Many large banks tend to be much more conservative in lending so you may want to consider a community bank or credit union for a small business loan.
Factoring is perfect if you have high amounts of account receivables. You can obtain funding up to 25 million and you can receive your advance within 24-48 hours in most cases. With factoring, you sell your company’s accounts receivables to a company (known as a factor) at a discount, in order to free up your cash. The company that purchases the receivables then assumes the responsibility for collecting them. This is a great option as they absolutely don’t care about your own personal credit.
Grants are a great way to get money for your business, especially government grants. Depending on your business types and intended use of funds, there are many options available for you to receive grant money that doesn’t need to be paid back.
Lines of Credit.
Lines of credit are perfect sources of working capital. A line of credit works like a revolving credit card but with much lower interest rates and higher available credit limits. You can get credit lines over $150,000 and write checks from the account or use a debit card to withdraw funds or use for purchases.
Merchant Cash Advances.
Merchant cash advances are perfect for businesses who process credit card payments. This type of financing will advance you money against future credit card transactions. You can even get a debit card to use the funds you secure. This is option is perfect for my clients who are just starting out because it helps them build business credit and get the funding they need.
Microfinance loans are less difficult and time intensive to qualify for with loan amounts ranging from $500 to $35k. Many businesses use several micro loans to get money for their business versus applying for one larger loan due to the easier qualifying criteria.
Venture capital is neither easy nor fast to be able to tap into but can be a viable source of funding. This is a great source when you need higher loan amounts, and don’t mind giving up a potential stake in your company. Plus you don’t have some of the headaches that come with conventional funding.
Now that you have your short list of options, it’s time to create your funding strategy, whether it’s one avenue or a combination of several you now have an overview of what’s available for you and your business.
Juliet C. Obodo is the founder and CEO of trendfund. A financial consulting firm for lifestyle brands. Based in New York with clients all over the US, she takes a Swiss-Army knife approach to funding your business. Not sure which funding option works best for you? Download her free cheat sheet. It outlines the application requirements for over 15 funding sources. Visit http://trend-fund.com/funding-cheat-sheet/ to get your copy.