There are many creative ways to finance your business. Here are some common and creative ways to finance new or existing business ventures.
Family and Friends
1. Write a business proposal as if you were going to write one to get a loan from a banker. Discuss what the business is doing, the market demand for your product or service, how you intend to market your product or service, including financial projections: in what time frame do you anticipate the business will turn a profit. Includes financial reports and tax returns.
2. State how much money you need, what the money will be used for and terms of the loan such as interest rates, how you intend to repay the loan whether this is in lump sum or in scheduled payments. You must also state whether the loan is secure, that if you cannot repay the loan, the lender will have a percentage of ownership in the business. In making your proposal more attractive to lenders, you might consider having a promising note or agreement that states financial terms, scheduled payments and the right to business if the notes are not paid.
3. Don’t forget the tax benefits of using promissory notes, if for some reason you are unable to 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 40Billion, raised $ 105,000 for his first business from 7 partners, two of whom are his sisters and aunt.
Equity in Exchange for Expertise
If you have a brilliant idea you may be able to find someone else, whose service is willing to receive some form of equity in return. These could be legal services, engineering services, or marketing services, the possibilities are endless. For example: many new start-ups require legal formation such as becoming a company. You can contact a licensed attorney in your area, who specializes in start-ups, many attorneys if the idea is one where the potential for future profits is great, will agree to postpone legal labor costs, and will ask you to only pay fees in advance, such as filing fees. You can offer anywhere from 1-2%, to delay legal fees and agree to pay legal fees once funding is obtained.
People want to be apart from the next big thing, in that providing an attractive proposition with reasonable terms and conditions you can create a winning business relationship that allows your company to grow and be successful. Countless start-ups have taken advantage of this financial strategy in launching their businesses. When Google was just an idea, Google’s Larry Page and Sergey Brin, had convinced their owners to take a stake in their company in exchange for free rent.
In applying for a commercial loan there will be many paper requirements, which generally include your business plan, financial reports, credit reports, consolidating documents and tax returns. Commercial banks will evaluate your business against 5C credit:
1. Capital – how much of your own money you have in the business
2. Character – your reputation in business, they will look at your credit score, credit history, such as making payments on time, the amount due to other creditors and if you have a rating or a lien.
3. Capacity – your business’s cash flow and ability to repay loans.
4. Collateral – assets that your business owns such as equipment or real estate as security for loans. The Collateral Potential is someone else’s ability to pay off the loan if you don’t.
Small Business Administration Loan (SBA)
If you cannot get a commercial loan, you can apply for an SBA loan, as a condition of applying for an SBA loan is that you have to find a loan from a conventional lender and cannot get a loan with reasonable terms. The SBA guarantees 75% or up to $ 750,000 of loans made by private lenders. As a business owner, you must guarantee the loan personally and show you sufficient cash flow to pay off the loan.
Angel Investors and Venture Capital
Many early-generation companies accepted Angel’s investment. Angel investors specialize in early stage financing. They are often more willing to invest in ideas where there is too much risk for the bank and not enough potential for the venture capital firm. They usually invest smaller amounts anywhere from $ 100,000 to 3 Million and are willing to investi for the long term – 5 years or more. Often times a company will start out with an angel investment, if the company is to be a high net worth company and large profits are predictable a Venture capitalist will likely be involved.