There are many ways to finance your business. Your own money that you have saved over time is the most obvious, but if that is not available then other sources must be found. Relatives and friends could be a source for temporary funds, but usually not long-term loans. Reliable long-term financing of a business is something that all businesses face at sometime during their life.



Cash flow



Cash flow is without a doubt is the biggest problem that all businesses must face. It does not matter the size of the company. The bigger the business, the bigger the cash flow problem. A growing young business is very likely to experience cash flow problems. The luxury of ready cash is one that comes with time and success for a business. In the meantime there is a need to get short term financing so the business can operate. If the owner’s savings have already been tapped, then other sources must be found. If the owner has a good credit rating then the bank may consider a signature loan to the individual and not to the business. The bank could also give a revolving line of credit that is backed by real estate or stocks.



SBA loans and factoring



Another way to get financing is to see if you can qualify for a SBA loan. This loan is again made to the individual and not the business. These are not quick to get or easy to get for the business borrower. Without some assets, you are not likely to qualify for such a loan. Further down the list of ways to get money for the business is to factor your account receivables. This can be easily done if you are selling to quality clients. Each factoring company has its own rules and what invoices they will accept for loans. These loans are limited only by the amount of your invoices and their quality. If all of your jobs are custom in nature, then you could demand a 50% deposit on all work you accept.



Angel financing



Another source of money is seeking out what is known as angel financing. This money comes from wealthy investors who are seeking out promising young companies that should prosper if they have the money that is needed. There are several advantages to this financing, as it does not have to be repaid until the company is taken public or becomes so successful that the angel can be bought out. When you accept an angel you in affect take on a partner. This is not all bad as the angel could have contacts to grow your business. Successful individuals like this cannot only bring in capital, but also business expertise that could help your business grow faster and with a more solid base.

You can find these angels by looking on the Internet or asking bankers or brokers in your area. They exist everywhere, but are usually found in bigger cities.



Bring in a partner



You can advertise for a partner to come in and help you grow the business. There are people in every city that are looking for a business opportunity that have money for the right situation. This is a longer-term answer that should be considered only if you feel the person that you are considering would be someone you could live with. Do not swap a temporary problem for one that will be long term in its effect. Partners in a business are similar to partners in a marriage. There are good unions and bad ones. You never know for sure what you are getting until later.

Private personal loans can be obtained, but the interest rate that will be charged will be higher than what the bank will charge. Second mortgages on real estate are usually rather easy to obtain if there is sufficient equity in the property. The problem with all of these loans is they are made to the owner and not the business. If the business fails, the owner is still liable for the loan. When a business is very successful the banks and other lenders will make the loan to the business without the backup of the owner. But that will not be the case with a young growing business.

There are many options for raising money to finance a business. The problem with all of them is they depend on having assets, good credit or significant cash flow when compared with the loan size. There are very few options that do not tie up the business’s assets and the owner’s. Few lenders will make loans to the business by itself. One of the few loans made to the business is factoring loans. Using the invoices as collateral for the loans makes this possible.



Private offering to friends



Another method to raise money is to make a private offering of stock to a small group of investors. This is easier said than done, but it is possible if you have the right group of people available. It has to be a small group or it would be considered a public offering and not a private investment. The rules are very stringent on this type of stock offering. Get good advice before you attempt it.

A business cannot thrive if it is under financed for long periods of time. This problem must be resolved and the sooner the better. The struggle to live within the cash flow stream is one that all businesses face and it can make it extremely difficult for the business to prosper if they are always fighting the finance battle.

Solving this problem is worth the time and trouble, as it will allow the business to have some breathing room and enjoy its growth. All possible solutions should be explored, as some are more of a fit than others. Obtaining fresh capital is always the way to go if the payback is not onerous. Getting the money is always the goal, but it has to make economic sense over the long run. Be careful not to jump from a small fire to a big fire that can consume you and your business in debt.

Once the financing issue is under control, a business owner has the capability of growing the business in a manner that is sustainable. This is the goal of every business. Financial control is a precursor to successful growth, which can be carried forward into the future. When financing concerns are put in their place, the business will be able to grow with fewer problems or at least not those of a severe financial nature. Cash flow must always be watched and managed so the bills can be paid in a timely manner. Maintaining a good credit rating is always in the company’s best interest.



Seller Financing



Up to 90% of businesses sold are financed in some way, by either the seller or from other outside sources. Usually sellers do this when a buyer has difficulty qualifying for a conventional loan or meeting the purchase price. Read our article on the seller financing basics for more information.



Conclusions



Financing a business is never easy and a young business faces even more difficult problems to overcome. If the owners have money then the problem is fairly easy to solve. If there are no assets or extra money available all sorts of schemes will need to be played out in order to live with money short falls. Short-term money will need to be found from many sources. The ideas presented have been used by many businesses to overcome short-term money crunches. Surviving over time seems to allow the company more room. Every money crunch that is resolved will ease the problem for few days or even weeks. As a business grows, the money problems will always be there, but maybe not as severe in nature.




By: Bill Henthorn