Ten ways to fund your company

Financing a company is always a challenging task. Here we compiled ten strategies, including factoring, from the tried-and-true to the experimental.

Seeking funding in any economic environment can be difficult, whether you’re looking for start-up assets, resources to grow, or money to hang on in rough times. Yet, despite our current state of affairs, raising capital is as tricky as ever. To help you find the money you need, we’ve compiled a guide to 10 funding strategies and what you should learn while trying them.

  1. Consider Factoring

Factoring is a financial way for a company to sell its receivables at a reduced price to get cash in advance. Companies with low credit or by companies such as apparel manufacturers often use it to fill out orders long before they are paid. Nonetheless, this is a costly way to collect money. Companies selling receivables usually pay a commission that is a percentage of the total cost. If you pay a 2% fee to get the funds 30 days in advance, that’s equivalent to an annual interest rate of around 24 percent. That’s why the business has gained a bad reputation over the years. That said, the economic crisis has caused corporations to scramble for alternate forms of finance, and corporations like The Receivables Exchange are attempting to make factoring more profitable. The exchange allows companies to offer their debts to dozens of factoring companies at once, along with hedge funds, banks, and other finance companies. These lenders will bid on invoices that can be sold in a bundle or one at a time.

  1. Get a loan from a bank

Lending guidelines have become much stricter, but banks like J.P. Morgan Chase and Bank of America have provided additional funding for small business lending. So why not apply?

  1. Use a Credit Card

Using a credit card to finance your business is a highly risky business. Fall back on your payment, and your credit score will be disturbed. Pay just the minimum every month, and you could make a hole you’re never going to get out of. However, if used responsibly, a credit card can get you out of the occasional jam and even extend your accounts payable period to boost your cash flow.

  1. Tap into Your 401(k)

If you’re unemployed and thinking about starting your own business, the money you’ve accumulated in your 401(k) over the years can look too appealing. And thanks to the tax code provisions, you can activate them without penalty if you follow the right steps. The steps are straightforward and easy, but legally complex, so you’re going to need someone with the professional experience of setting up a C corporation and an appropriate pension plan to roll in your retirement assets. Remember that you’re investing your pension plans, which means that if things don’t work out, you lose your business and your nest egg.

  1. Try Crowdfunding

Like Kickstarter.com, a crowdfunding platform can be an enjoyable and easy way to raise funds for a reasonably low cost, innovative project. You’re going to set an aim on how much money you’d like to collect over a period of time, like, $1,500 over 40 days. Your friends, relatives, and strangers use the platform to commit money. Since its release last year, Kickstarter has funded nearly 1,000 campaigns, from rock albums to feature films. But keep in mind, this is not about long-term financing. Instead, it’s meant to make it easier to ask for and give support to single, one-off ideas. Generally, project developers provide opportunities to contribute, such as if you donate $15 to a novel, you’ll get a book in exchange. There is no long-term return on investment for supporters, and there is no ability to write off donations for tax purposes. Still, that hasn’t stopped close to 100,000 people from committing to Kickstarter projects.

  1. Pledge Some of Your Future Earnings

Young, ambitious, willing to make a bet on your future earnings? Consider how Kjerstin Erickson, Saul Garlick, and Jon Gosier are trying to raise their money. Through an online marketplace called the Thrust Fund, the three offered up a percentage of their future lifetime earnings in exchange for upfront, unnamed venture financing. Erickson is willing to swap 6 percent of her future lifetime earnings for $600,000. The other two contractors each offer 3 percent of future earnings for $300,000. Beware: the legality and enforceability of these “personal investment contracts” have yet to be established.

  1. Attract an Angel Investor

If approaching an angel investor, all the same rules still apply: be succinct, stop jargon, have escape plans. Yet the global instability of the past few years has made the challenge much more difficult. Below are few tips to win over an angel’s interest:

  • Add experience: seeing some white hair on your management team will help reduce investor fears about your company’s ability to deal with a tough economy. Even an unpaid but highly experienced consultant could add to your credibility.
  • Don’t be a fad-follower: did you begin your business because you’re passionate about your idea, or because you want to profit off the latest trend? Angels can see the difference, and they won’t pay much attention to those whose companies are essentially rich-quick schemes.
  • Know your facts: You would require industry analyses, strategic research, and sound strategy and distribution strategies should you want to get anywhere as an angel. Also, young businesses need to show an advanced understanding of the business they are about to enter and the strategy to be practiced by their game plan.
  • Stay in touch: an angel may not be interested in your company right away, particularly if you do not have a track record as a successful entrepreneur. To counter this, you can devise a way to hold them in the loop of significant events, such as large sales.

  1. Secure an SBA Loan

With banks hesitant to take any chances with their own money in the wake of the credit crunch, loans guaranteed by the U.S. Small business administration has become a hot commodity. Indeed, funds to cover unique cuts in payments and incentives for SBA-backed loans have run out several times. And although SBA-backed loans are available to any small company, a range of requirements exist, including:

  • Under the statute, the SBA cannot offer loans to companies that can raise the funds they need on their own. So, you have to apply for a loan from a bank or other financial institution on your own and be turned down.
  • To count as a small business, your corporation has to follow the government’s concept of a small business for your industry.
  • Your business may need to meet additional criteria depending on the type of loan.
  • Once you have determined that your business meets the qualifications, you need to apply for a commercial loan from a financial company that processes SBA loans because the SBA does not provide loans directly. The qualifications of the bank may be stricter.

  1. Raise Money from Your Family and Friends

Contacting your family and friends is the most common way to fund a start-up. But when you turn your loved ones into creditors, you risk their financial future and jeopardize critical personal relationships. A classic mistake is getting close to friends and family before a formal business plan is in place. To avoid this, you should provide proper financial projections and an evidence-based assessment of when your loved ones will see their money again. This is expected to reduce the likelihood of unpleasant surprises. It also lets the supporters know you’re taking their money seriously. You also need to take a serious look at how the arrangement will be structured. Are you offering equities? Or is this going to be a loan? Perhaps most importantly, you need to stress the risk involved. Offer a strong business plan but remind them that there is a good chance that their money will be lost. It’s better to mention that in front of Aunt Lucy than at Thanksgiving dinner.

  1. Get a Microloan

The lack of credit history, collateral, or the inability to secure a loan through a bank does not mean that no one will lend to you. One option would be to apply for a microloan, a small business loan of between $500 and $35,000. Microloans are often so small that commercial banks cannot take the trouble to lend the funds. It would be best if you turned to a micro-lender instead of a bank. A non-profit organization that works differently than a bank. Microlenders offer smaller loan sizes, usually require less documentation than banks, and often apply more flexible subscription criteria. There are a few hundred micro-lenders across the U.S., and they often charge a slightly higher interest rate on loans than banks. “Microloans are truly a start-up entrepreneur or an entrepreneur in an existing business with a capital gap that needs to secure capital for new equipment or contract services,” says Connie Evans, president, and CEO of AEO, represents 400 mostly non-profit micro-loans and micro-enterprises.