We hear about venture capital firms and angel investors, but if you are the typical small business or a start-up, you are not getting money from these entities. They are looking for investing large amounts of money in exchange for a big payout. If you are the average mom-and pop business (or just starting out), where do you get capital to start, expand or manage your cash flow?
If you are just starting out, you have no collateral to give anyone in exchange for their money. You have an idea for a business and hopefully you’ve done some market research to establish that someone will buy your product or use your service. Most banks will not talk to you about a loan. You will be self-funding your business. Most start-ups raise cash through the savings of their owners, the credit on their credit cards and maybe re-mortgaging the house. Occasionally, you will get funding from family members and friends who believe in you and your idea. They will chip in, sometimes in exchange for an ownership interest, sometimes just with a promissory note.
There are online microloans (i.e., Kiva) and crowdfunding platforms ( i.e., Indiegogo and Kickstarter). But microloans carry high interest rates and crowdfunding platforms typically require you to publicize your need for capital. Who will you publicize your situation to? Your family and friends. If you have an exceptionally catchy backstory, the crowdfunding platform may do some publicity for you but mostly you are responsible for raising the money yourself.
But, mostly, new entrepreneurs bootstrap their financial needs. They either work at a job while saving money before they open their business or reinvest any profits to buy more inventory or pay themselves a salary to live on.
If you are an established business, and cash flow is a problem (customers are paying slower than you are paying your vendors), then you will probably seek a different source of financing. You should start by asking your vendors if they will extend credit (payment in 30-60 days). If that does not solve your problem, you can ask your bank branch manager (with whom you’ve developed a relationship) if your bank offers business lines of credit. If you have substantial accounts receivable (your customers are not paying their bills to you), there are factors which are businesses that buy your accounts receivable from you, at a percentage of what they are worth. You don’t get the full value of your work, but you do get some quick cash. You can also use your accounts receivable as the collateral for a loan. You can increase the number of owners of your business – exchanging a cash investment into the business for a percentage of the ownership interest. Since your business has a track record at this point, you may find it easier to persuade others to invest in your business. The Small Business Administration offers all types of financing assistance through its lending partners, if you qualify (check them out at http://www.sba.gov). You can also check with your state to see if it has any programs that help finance small businesses. You can use your personal collateral for a personal loan and then lend the proceeds of the personal loan to the business. Be aware that if the business can’t repay you and you can’t repay your lender, you can lose the collateral, so be very careful if using this source of cash.