There are many creative ways to finance your business. Here are some common and creative ways to finance your business venture.
family and friends
1. Write a business proposal as if you were writing one to obtain a loan from a banker. Discuss what the company does, the market demand for the product or service, how you intend to market your product or service, include financial projections – over what period of time you anticipate the company will make a profit. Include financial statements and tax returns.
2. Indicate how much money you need, what the money will be used for, and the terms of the loan, such as the interest rate, how you plan to repay the loan, either in a lump sum or in scheduled payments. You should also state if the loan is secure, that in the event you are unable to repay the loan, the lender will have a percentage ownership in the business. To make your proposal more attractive to the lender, you may want to consider having a promissory note or agreement that sets forth the financial terms, scheduled payments, and the right to the business in the event the promissory note is not paid.
3. Don’t forget the tax benefits of using a promissory note, if for some reason you can’t pay the loan in full, the lender will be entitled to a tax deduction known as “bad debt.” Warren Buffet, who is now the second richest person in the world with an estimated net worth of $40 billion, raised $105,000 for his first business from 7 partners, two of whom were his sister and his aunt.
Equity in exchange for experience
If you have a brilliant idea, you may be able to find others who are willing to accept some form of capital in exchange for their services. These can be legal services, engineering services or marketing services, the possibilities are endless. For example: many new businesses require legal formation, such as becoming a corporation. You can contact licensed attorneys in your area, who specialize in start-ups, many attorneys if the idea is that the potential for future earnings is great, they will agree to postpone legal labor costs and ask that you only pay the initial costs, as well as filing fees. You can offer between 1% and 2% for deferral of legal fees and agree to pay legal fees once funding has been obtained.
People are eager to be a part of the next big thing, by offering an attractive proposition with reasonable terms and conditions, you can create winning business relationships that allow your company to grow and succeed. Countless startups have used this financial strategy to launch their business. When Google was just an idea, Google’s Larry Page and Sergey Brin convinced the owner to take shares in their company in exchange for free rent.
Commercial Loans
When applying for a business loan, there will be many requirements on paper, which typically include your business plan, financial statements, credit report, incorporated documents, and tax returns. A commercial bank will evaluate your business based on the 5Cs of credit:
1. Capital: how much of your own money you have in the business
2. Character: your reputation in business, they will analyze your credit score, credit history, how to make your payments on time, the amount owed to other creditors and if you have judgments or liens.
3. Capacity: Your business cash flow and ability to repay the loan.
4. Collateral: Assets your business owns, such as equipment or real estate, as collateral for the loan. Potential collateral, that is, the ability of someone else to repay the loan if you don’t.
5. Conditions: how you intend to use the funds and for what purpose.
When applying for a business loan, you should research multiple lenders, what businesses they finance, compare interest rates and terms.
Small Business Administration (SBA) Loans
In case you are unable to get a business loan, you can apply for an SBA loan, as a requirement to apply for an SBA loan is that you must have sought a loan from conventional lenders and were unable to obtain a loan on reasonable terms. . The SBA guarantees 75% or up to $750,000 of the loan made by a private lender. As the business owner, you must personally guarantee the loan and demonstrate that your cash flows are sufficient to repay the loan.
Angel investors and venture capital
Many start-ups have received investment from Angel. Angel investors specialize in early stage financing. They tend to be more willing to invest in ideas where there is too much risk for a bank and little potential for a venture capital firm. They typically invest smaller amounts between $100,000 and $3 million and are willing to invest for the long term: 5 years or more. Many times companies will start with an angel investment, in the event that the company becomes a high net worth company and large profits are easily anticipated, a venture capitalist is more likely to get involved.
Venture capitalists specialize in high-growth industries and rarely invest less than $5 million at a time, as they want the company to grow quickly, ideally by taking the company public, to get paid in the shortest possible time, usually 3 to 5 years. It can be extremely challenging to raise venture capital, on average, venture firms receive thousands of business plans annually and are highly unlikely to invest in a business that was not recommended to them by an acquaintance. It is estimated that only 1 in 600 business plans received from Silicon Valley venture firms even receive consideration, let alone funding.
To increase your chances of funding, it is recommended to join business associations and business organizations that have the participation of venture capital firms, this way you can establish valuable networks and contacts. In the meantime, as you network and get your name out there, continue to build and refine your product or service to make it better every day. Don’t be discouraged if your business plan is rejected, as this is very common and it doesn’t mean you don’t have a great idea or business. Scott Cook, founder of Intuit with a $2 billion-plus company providing accounting software: Quicken and Quickbooks, was shunned by all venture firms in 1984, venture firms said, most people don’t have one computer let alone require computer accounting software, therefore there is not a large enough market to invest in it.
Lines of credit with mortgage guarantee
If you own a home with a substantial amount of equity, you may want to consider getting an equity line of credit, as they offer some of the best interest rates available. It’s important to consider all risks carefully, since you need to make monthly payments and you don’t want to lose your family home to launch your new business.
Business Plan Contests
Business plan contests are a great source of getting capital to start your new business when you don’t have the connections to angel investors. Business plan contests have become very popular in recent years, many leading universities and companies have business plan contests. You submit your executive summary or business plan and, if selected, typically present your business to a panel of judges who will award funds to the best business ideas. Some competitions have restrictions where you have to be affiliated in some way.
The Stanford University business plan competition requires 50% of team members to be Stanford graduates, while others are open, such as the Rice University business plan competition, where they allow you to apply. graduates from all over the world. In April 2009, Rice University had 42 groups present their business ideas to a panel of judges, 3 of whom were paid $125,000. For a list of business competitions, visit: http://www.nytimes.com/interactive/2009/11/11/business/smallbusiness/Competitions-table.html.
Credit cards
Credit cards can be a great source of quick money. Many credit cards offer cash advances at very low interest rates for the first 6 months, which you can transfer after the 6-month low interest rate has ended. Credit cards can generally be a short-term solution to a financial need, but they are not recommended in the long term.
