Venture capitalists and angel investors can be very useful external sources of capital for established companies, but the value they bring to startups and startups is questionable at best. Entrepreneurs should aim to finance their businesses by means other than venture capitalists, private equity, and angel investors, unless a large fortune is needed to fund business start-up activities or they choose to work with investors who focus specifically in the start-up of companies in very early stages. Here are eight strategies many entrepreneurs can choose to finance their businesses:
Business credit cards
Many successful companies, such as Under Armor, were financed with credit cards in the early stages of their business. Although credit cards are not necessarily the most ideal source of financing, since they have their drawbacks, if used correctly, they can be a very effective source of financing.
How to use a business credit card correctly:
– Effectively manage cash flow by not having to pay for purchases until the end of the billing cycle.
– Use it to pay for your fixed and upfront start-up costs so you can make your first sale
– Plan in advance how you will pay the balance, then create a backup plan
Things to look for in a business credit card:
– If you are carrying a balance, look for low APR
– If you are out of balance, look for great cash rewards and introductory promotions
Supply chain financing
If you sell products, see if your supplier, manufacturer or distributor could issue you a very favorable loan or line of credit. After all, the more successful you are, the more successful they will be, and they understand that. You will be surprised how common this is – many vendors, manufacturers, and distributors have even established procedures for these circumstances. All you have to do is ask.
SBA microloans
If your business needs less than $ 35,000 or less, you should consider applying for a microloan. A microloan is a small, short-term loan available to small businesses that can be used as working capital or to purchase new inventory, supplies, or machinery. These microloans are available through the SBA, but are distributed by non-profit intermediary community lenders. Although these loans generally require some type of collateral, they also offer very favorable terms and are quick and easy to receive.
Business plan contests
There are numerous business plan competitions across the country dedicated to awarding cash prizes to selected entrepreneurs to fund their businesses. While the vast majority of these contests are geared toward undergraduate and graduate students, there are many state and local contests open to the public.
Many schools, such as the University of Texas Austin, host business competitions open to all students from accredited universities. Other universities, such as the University of Maryland, host open competitions just for their students.
If you are not a student, don’t worry. Try Googling business contests in your state or county, as many local chambers of commerce host contests to support local businesses. For example, there is the Washington DC Economic Partnership Contest, the Jefferson City Area Chamber of Commerce Contest, the Enterprise Center Boston Contest, and the Bizzy Awards.
All of these contests are great because not only do you get great experience presenting your idea to investors, but you also have a chance to win a substantial amount of free money and receive tons of free press.
Subsidies
Grants are essentially free money and are one of the most desirable sources of funding for that very reason. Unfortunately, they are also one of the most difficult to obtain. Most grants are awarded by state and local governments, and most grants are reserved for businesses that have the potential to provide great service to the community, such as high-tech and medical research companies. Searching for grants can be a very exhausting process with scams around every corner. Start your search on Grants.gov and State Small Business Grants, and be weary of any non-governmental or for-profit entities.
Personal savings
While not the most creative source of financing for a new business, personal savings is still one of the most popular methods. Personal savings allow entrepreneurs to own 100% of the capital stock of their company. Compared to other financing methods, personal saving offers very attractive terms, as it leaves you liable to no one but yourself, and the cost of capital is simply the opportunity cost of investing that money elsewhere. Personal savings should always be taken into account, as it is one of the most ideal sources of financing.
Friends and family
Even experts cannot agree on the role that friends and family should play in financing a new business. For one thing, funding from family and friends can be quite simple and straightforward, as there is mutual respect and understanding. Friends and family will be more willing to give you very favorable terms, and they may also be less strict in their rules about how the money can be used. However, on the other hand, you have the ability to force important relationships in your life for money. If the business starts to deteriorate, there could be unnecessary pressure coming from the very people you need support from. Ultimately, this source of financing depends on each individual entrepreneur and depends on a number of specific circumstances.
Barter
Many startups have very little cash and credit. Paying for a necessary good or service can be impossible, leaving many entrepreneurs in a trap. One possibility would be bartering for that necessary good or service. Build a strong relationship with the other party first, and then make a proposal. Remember, always consider the other party’s point of view and “what’s in it for them.”
The above are suggestions as ways to finance a business start-up, but ultimately each situation is unique. Always evaluate each possibility thoroughly and compare them to comparable alternatives.
