4 financing vehicles for startups and how to choose between them.
For business owners and entrepreneurs with a lot of money saved up, the main obstacle to starting a business is coming up with a viable idea. But many aspiring entrepreneurs have a different problem – the idea is there, but the capital isn’t.
Obtaining startup financing is made even more difficult since traditional banks rarely offer business loans to brand new entrepreneurs. That’s because lenders want to see a financial track record for your business that demonstrates your ability to repay the money they’re lending you. Without that history, the lender does not have the foresight to know if your venture will be successful enough to make good on your obligation.
So, this begs the question, what’s a would-be small business owner to do?
Lucky enough, alternative lenders have been able to establish an abundance of financing options to help you fund your new venture. Here are four options for financing your startup and how to choose between each of them.
Factoring
Factoring, otherwise know as accounts receivable financing or invoice advancing may help ease the growing pains for small businesses. Basically, this alternative form of financing allows the business owner to receive capital in the event you are owed money for services completed. By enabling the business owner to close the pay gap, they can continue operating at full capacity and accept new projects more quickly. This also helps ensure steady cash flow.
This type of financing can be optimal because the focus is on the business that owes the receivable and not the company receiving the advance. The value here is witnessed when a contract for products or services is received, but the business lacks the cash to fulfill on the contract. Simply put, A/R financing is turning your company’s accounts receivables into immediate cash. For an example check out: What is Accounts Receivable Financing?
Business Line of Credit
Business credit cards or lines of credit are among the most flexible financing vehicles to help fund your startup, and can be a quick way to get your small business up and running. Credit lines provide a business owner with quick capital to draw upon to meet a variety of business needs. Basically, it’s sort of a financial cushion for a predetermined amount that you are able to exercise at anytime to meet a cash flow gap.
This type of financing generally comes with the actual usage of the available capital. You are not required to use any of the funds until you need them and are only charged interest when it is used. Plus, as you pay the credit line down you also eliminate the interest charged. Simply put, if you are a business owner who is just starting out and you don’t have a ton of money coming in, or you don’t have a ton of expenses, you can put it on a credit card and pay the minimum payment.
SBA Startup Loan
The SBA is typically known for providing loans to established businesses, but that does not mean there is no hope for somebody trying to get their business off the ground. If you are able to meet the SBA’s requirements and possibly give a pint of blood you may be able to qualify for an SBA loan. Generally, these loans are available to partially financed startups (the SBA likes to see around 30% of the owners own money in the business) and startups where the owner has some experience in the industry and in management.
This type of financing is not personally provided by the SBA, rather, they establish the guidelines for an approved intermediary and then guarantee a percentage of the loan, (in case of default) which minimizes the risk for the lending partners. This financing vehicle is available to small businesses when funding is otherwise unavailable on reasonable terms. To learn more about SBA loans for startups, or to see if your business qualifies check out: SBA Loans.
Crowdfunding
Crowdfunding on websites like Kickstarter and Indiegogo are helpful when an entrepreneur focuses on raising small amounts of money from a large number of people. This can results in a large influx to the financing aspirations of a small business.
Both these sites and many others allow businesses to pool small investments from a number of investors instead of forcing companies to look for a single investment. There are many different ways to crowfund as this method of financing is typically available to any type of startup business. Some rely on the strength of their campaign, some offer rewards and incentives to their supports, and others provide shares of their business.
Next Steps
With the plethora of alternative financing options now available there are many different ways to get startup capital for your business without a traditional bank loan. The important thing responsible business owners should ensure is to understand how much financial assistance they really need. By knowing how much investment your need and how it will be used is a sure sign of success and diligence. Doing this will allow you to raise the startup capital your business needs.
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