Last Updated on April 8, 2016
Obtaining business financing can be quite a challenge, especially if you are seeking to borrow money based on your business, not your personal needs. With some business structures, including limited liability companies, your business is held responsible for loan defaults, not you. And that is why lending options are so few to start up businesses: not many people want to risk lending money to your burgeoning enterprise.
Fortunately, you do have some options when it comes to small business financing. Your banker is, of course, someone that you will want to approach, but there are other methods of financing to explore too including the following:
There are venture capitalists and there angel investors. Better is the individual or people that will back up your enterprise and let you do all the work.
Such silent partners provide a capital infusion, but they do not involve themselves in the management of operations. At least not directly. This does not mean that you can willy-nilly do as you please, but it does give you more freedom than what you would have with an active partner on your team.
Silent partners prefer to stay out of the spotlight for a number of reasons including a desire to conceal wealth and perhaps to avoid the publicity of having the “deep pockets” that others may also want. As far as paying back this individual, proceeds from profits may be one way or the individual may have the option of exercising stock options should you take the company public.
Some businesses get started with little money, but rely on creditors to sustain their operations. In essence, a supplier may be willing to extend to you the goods and materials you need to make your products. Once your “widgets” are built, then you pay back the supplier.
Essentially, you are establishing a business based on floating money or cash. Such cash floats enable you to make use of something that you will buy later in hopes of selling a finished product and paying back what you owe. Are there companies willing to provide such a lengthly pay back? Yes, especially managers that want to keep their plants humming and can defer billing until you’re able to pay. Certainly there is much risk involved, but then that’s business.
At some point, you knew that asking family members, friends and associates for money was going to come up. Notice that we waited until third section to mention it. Clearly, borrowing money from people that you know is fraught with risks, but it comes with an important benefit: these people know you and you know them.
Bet your bottom dollar that you will need to have all of your ducks in a row before asking people you know for cash. This means writing up a business plan and offering a detailed explanation of what you are planning to do. If you are already in business, that is one thing. If you are looking for seed money, then you need to demonstrate how that seed will germinate into a towering tree.
Expect many questions, much hesitancy and know that everything should be made in writing. Should the deal go sour, will you be able to look these people in the eye? Moreover, will you be able to make payments and when will your first payment start? You may stand a better chance of getting a family loan if you offer something as collateral, perhaps that prized schooner if Uncle Fred ponies up some cash.
Okay, you’ve tried the three previous steps and you still don’t have enough money. Maybe the problem isn’t so much money, but your perception on how to run a business.
When interviewed by Inc. concerning his bootstrapping success, entrepreneur Greg Gianforte offered, “A lot of entrepreneurs think they need money … when they actually haven’t figured out the business equation.” Moreover Gianforte says that bootstrapping is actually low risk as you cannot make fatal mistakes — you don’t have sales or do you have customers. Your only loss is time.
Bootstrapping has been successfully practiced by many successful entrepreneurs some who went on to grow big businesses. Dell Computers, Apple and Microsoft are three that come to mind, started by one or two individuals in a garage and eventually catching on. Boostrappers work with what limited sources they have and often employ a variety tactics to keep their doors open. Bartering, cash float and various creative financing schemes are among the options that savvy bootstrapping entrepreneurs must look for.
Ultimately, you may employ a variety of ways to raise cash for your business. Some people do max out their credit cards, fully expecting to recoup their investment at some point. That option may be more risky than the rest, but then going into business for yourself is not some risk-free pursuit.
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