Methods for Financing Your Business

Spread the love

When your business needs cash, it is amazing how many methods are available to you. Let’s look at a few of the methods you can use for financing your business.
Invoice Factoring
Invoice factoring is the practice of selling your invoices to a third party collector in exchange for a percentage of the outstanding bill. The older the bill and the weaker the credit of the party who owes it, the less you’re paid. The upsides of this include eliminating the need to invest time in further debt collections, raising capital now without interest and fees and the act having no impact on your business credit. The downsides of this are that you lose money by selling the collection rights and may end up using this practice instead of altering your payment terms to 30 days or refusing to cut off slow-pays. Then there’s the fact you cannot utilize this method at all if you don’t have any outstanding invoices.
Crowdsourcing
Crowdsourcing for businesses can be a boon or a bust. The benefit for small businesses is that crowdsourcing truly innovative product design can test the market for such a product and give you the capital to develop it at the same time, all while securing orders for your first production run. If you run a crowdsourcing campaign and no one is interested, you know not to bother investing your own money in the project. The downsides to this approach are the sheer volume of competition and the fact that you have to market it hard to the general public, instead of making your business case to the bank.
Bank Loans
Bank loans are a standard way of raising capital for your business. They’ll thoroughly vet your business plan and may give you access to business advisors to improve your business if you’re a customer. The downsides include the fact that they won’t issue very small loans at all, rely on your creditworthiness as an individual as a determining factor for issuing a business loan and prefer to loan to businesses that have been open for a while. The truly exotic and revolutionary businesses are avoided because of the perceived risk.
Personal Credit
You can use personal credit to raise money for your business. It is typically easy to get money from a credit card to invest in your business, but it comes with a very high interest rate. Mortgages against your home have a lower interest rate, but now your home is at risk if your business fails and you can’t pay the higher monthly payments. Personal loans to start up your business mean that a business failure is probably followed by a personal bankruptcy; you’ve destroyed the corporate veil and separation of personal and business assets at the very start. If you tap into your retirement account to fund your business, you may have to pay income taxes plus a penalty. If you take a loan against your 401K to build up your business and then lose your job, your 401K loan or the taxes and penalties for the early withdrawal all become due when you have lost your primary source of income. Rolling over your 401K into a new legal structure to fund a C-corporation requires up front legal bills and comes with its own risks.
Future Earnings
You can pledge future earnings to raise capital in two separate ways. One is through working capital loans. You can often secure these loans through your payment processor and they are repaid by taking a percentage of all of your incoming revenue. This is convenient but it comes with hefty fees and interest. Another option is entering a contract to pay an investor a percentage of your profits. Many investors require you to hand over your book keeping to them as the price of their participation. If you promise a percentage of your personal income as part of a personal investment contract, you’ll find few takers because the legality of these contracts are yet to be established by the courts.

About the author