Novice entrepreneurs quickly learn the depth of truth behind the old saying: “It takes money to make money”. Launching a business can be next to impossible without cash.
Stiff lending standards continue to cripple many start-ups. So what’s a fledgling business owner to do beyond borrowing from friends and family or maxing out credit cards? Here are some funding ideas to help you get started.
Keep your day job
Still have a job? Keep it. Your current job can be a springboard to your own company. You can make a living during the day and work on your fortune at night.
Just make sure your new venture doesn’t interfere with your day job and that you’re not in direct competition with your current employer. Starting up while you’re still employed can offer a number of benefits. Chiefly, it will give you a steady stream of cash flow to depend on and possibly put toward your business.
If you’re lucky enough to already have a couple clients under your belt, you might consider bootstrapping. That’s using your company’s cash flow to fund itself rather than relying on external financing.
Many companies have been built this way. Since bootstrapping requires ploughing business profits back into the company rather than taking them home, you’ll be amazed at the degree of focus you’ll have. Building your business this way requires keeping expenses low and establishing optimal target markets.
How to bootstrap? Work from home rather than rent an office; lease or even barter for equipment or services rather than buy them and create ‘sweat equity’, or deferred compensation arrangements with skilled friends or vendors. Put your negotiating hat on and snag better terms with suppliers.
Forming a joint venture or a strategic alliance could also help you share costs and risks while retaining full ownership of your company. And always put the cash you make or save back into your business.
Borrow your business
Maybe you want to take over an existing business. If so, keep your eyes peeled for motivated sellers. Just as with homeowners, there are business owners out there itching to sell.
Perhaps they want to retire. Or maybe they’re just sick of the daily grind of entrepreneurship. These kinds of owners may be willing to let you buy them out over time with a form of loan called seller financing.
In a typical arrangement, the buyer makes a down payment to the seller and then issues monthly or quarterly payments with interest over a set period of time until the loan is fully paid off.
Not every seller will just want to retire. They may aim to pass off a failing business on an unsuspecting buyer. So, make sure you do your due diligence. Look for and avoid additional encumbrances like law suits.
Turn revenues into royalties
Gaining prominence among start-ups is so-called royalty financing. Through this type of loan, owners must repay creditors (typically private equity firms) a percentage of their business’ incremental turnover usually from 2% to 6%.
While this financing isn’t cheap, you can retain ownership and a full equity stake in your company, which can be extremely appealing to entrepreneurs. And since payments are based on a percentage of turnover, if you have an off month, you aren’t forced to pay a fixed rate giving you greater flexibility to meet other bills as well.