Financing a business can prove tricky. You want to maintain a steady cash flow so as to not go bankrupt. Despite that, new injections of funds can help you grow beyond your previous capacity.
What are your options? We go through several of the basic ones for startups.
Types Of Business Finance
Bank Loans And Lines Of Credit
Banks are the standard finance institutions. Traditionally, businesses would schedule a meeting with a bank employee, provide the paperwork required for a loan, and agree on a long-term deal with business. You need to make sure that you or another owner in the company has a reliable credit history. Buy that business credit card for expenses and use it for evidence that you will pay back the loan.
With that said, not everyone qualifies for a bank loan, and sometimes the deals are designed to benefit the bank, to encourage higher rates of default. The qualifications can also be limiting. At DeepSky, we maintain that credit does not equal cash flow because you need to pay back that amount with interest, meaning you could end up badly in debt or bankrupt. Prepare to explore other options for financing.
Venture capitalists are companies that invest in a business, in exchange for owning a share. They tend to be enterprises looking to expand their portfolio and help a young entrepreneur grow.
The tradeoffs are that if you sell off too much of your company, you could risk losing ownership or creative control. Venture capitalists have more experience and economies of scale, which means they may feel less inclined to take risks.
Angel investors, unlike venture capitalists, are individuals that will invest in companies to seek equity. They are called angels because these investors will help guide entrepreneurs and serve as mentors.
The show Shark Tank shows angel investors in the flesh. They listen to different entrepreneurs who pitch products, and either make cash offers in return for equity or explain why the deal isn’t viable. While not every business owner should go on television to plead their case, this is one textbook example.
You can apply for grants to get cash flow for the subsequent year. These are government funds that are meant to spur certain types of business: arts, sciences, and technology. Art grants are often given to nonprofits, but you can still apply for them if your business qualifies. Science and technology are a facet of private businesses, so certain grants are made to foster innovation.
Prepare to write a lot of letters for these types of funds, because you need to prove that your business needs them. Many individuals and groups argue for them. If you are a great writer or have someone on staff to argue your case on paper, then research which grants will assist.
One way to fund your business, if you are sufficiently wealthy, is to liquidate the assets that you currently own and use them to provide the necessary capital. This can include cashing in on government bonds, dissolving CDs for the cash, or selling property. One example would be a former baker selling their equipment to find the cash for leatherwork.
Obviously, this option isn’t available to everyone and we don’t recommend it at DeepSky regarding personal funds. Only use this if you have cash funds from previous business ventures so that you can separate it from ones that would handle your home or family finances. Don’t take a second mortgage on your house to provide the necessary money for operations.
If you don’t want to borrow money from the bank, you can receive it from people that you know. Some smaller businesses do this, writing letters to their creditors and promising to pay back with or without interest within a given window.
The amounts are going to be smaller in what you borrow from individuals. In addition, you may risk mixing personal finances with business ones. With that said, several businesses have succeeded from this, as have individuals, and they paid back their loans on time.
Improve Your Funding Options With DeepSky
DeepSky believes in helping all of our clients manage their finances so as to turn a higher profit. We offer personalized accounting services at a fraction of the price from traditional accounting companies, to refine your portfolio.
Contact us today to get started on your business plan. DeepSky will ensure that you are ready, fiscally speaking, for the next round of expenses and operations.