Money. It’s something every business needs, but it can be difficult, especially for small businesses, to figure out how to get the funds they need to get started and then to expand their services.
Small businesses often don’t have collateral—something banks usually require for loans—so how do they go about getting a loan? Well, there are ways, so don’t think your personal funds are the only source of financing for your business.
Reading this article will help you develop your small-business funding strategy.
Strategic alliances can help your business accomplish more and get more funding. If you want to go this route, look for someone whomakes the most sense for your business. The relationship must be mutually beneficial in order to be successful in the long term. Find a person or a business that complements your business. Finding the right strategic partnership can be difficult, but it’s a great idea if you know the right person.
IRA or 401(k) Funds
This method allows you to directly invest in your new business using retirement funds, without taking a taxable distribution or being fined a penalty. The process isn’t too complex, but to ensure you do everything legally, it’s a good idea to find an expert or a company to help you.
Here’s how it works:
- Create a corporation. Establish a C corporation that has created but not issued stock.
- Create a retirement plan. Have the corporation adopt a retirement plan. A 401(k) can meet the requirements.
- Rollover retirement funds. Then,roll over your retirement funds from your previous employer or IRA into the new 401(k) plan.
- Transfer stock. Finally, the corporation transfers its stock to the new profit-sharing plan in exchange for cash.
This flexible form of financing can help you secure up to two million dollars, and it may provide significant tax benefits. Equipment leasing is for businesses that need to lease at least some of their equipment. However, like a loan, you will need good credit and be able to prove your ability to repay the lender, so this may not be an option for all small businesses.
The Small Business Administration gives loans up to two million dollars at reasonable rates. In order to secure these types of loans, you must go through a local bank, credit union or a nonprofit financial intermediary. Collateral may still be required to finance your business with these funds.
Microloans and Merchant Cash Advances
Microloans are normally for companies that can’t access other forms of capital because they’re just starting out or they’re too small. These loans can be up to $25,000, but they are often for smaller amounts. The good thing about these loans is that you can use collateral not accepted by traditional lenders. However, interest rates are higher than typical loan rates.
A merchant cash advance gives a business a cash advance, and the lender collects a percentage of the company’s daily credit card sales until the money is paid back along with the premium.
- Unsecured small business loans. An unsecured small business loan can give you a lot of money quick, and you won’t need collateral. This option is based on future credit card sales.
- Friends and family. Personal savings should be the primary source for starting and funding your business, but friends and family are often willing to help out, too. Loans from people you know may have better terms than other loans from banks.
- Credit cards. Financing with your credit cards can get about $3,000 to $10,000 for your business. It doesn’t require collateral, but you must pay it back in about 40 to 60 months. And remember, credit card debt is not typically considered “good debt” and carries higher interest than other forms of credit.
Angel Investors or Venture Capital
Angel Investors are wealthy individuals or networks that are willing to fund small businesses. They tend to finance small business for longer periods of time and expect a lower return on investment than do venture capital firms. Both make their return on investment in the event of an initial public offering or the trade sale of the funded company.
About the Author: Chester Hamlin is a financial advisor specializing in small businesses. He has been operating for 15 years and once started his own business, which he sold several years ago.