Money may not truly be everything, but it is an essential resource if you want to run a successful company. If you are not independently wealthy or comfortable with investing your life savings then you will still very likely need financial help from another source.
You may start with a trip to the bank. However, economic recovery has been slower than anticipated and was further stymied by the government shutdown in early October. Banks have tightened their lending to small businesses. Despite optimistic forecasting for 2014, small business lending in the latter half of this year was only at a third of 2008 lending levels. If you do not have adequate collateral or sufficient credit, you may still find yourself on the wrong side of a rejection letter.
Your first step, if you haven’t done so already, should be to handle the money you have more efficiently. Look for ways to cut your spending and accelerate the receipt of payments so you have as much cash on hand as possible.
Next, look to one of several alternate funding options that can bring in greater cash flow. Each has varying requirements for approval and offers different benefits:
- Crowdfunding – The SEC is finalizing its rules on crowdfunding for small businesses. Crowdfunding is a social investment method in which site users from around the world can invest in business ideas, typically for an incentive such as early access to a product or (in the case of media) producer credit. Sites such as Kickstarter and CircleUp have steadily gained popularity for their fundraising potential. While an attractive option, though, it will most likely be fraught with extra layers of administrative work. CircleUp reportedly rejects up to 98 percent of companies who sign up because they are a poor investment risk. Criteria include any combination of a solid business plan, an established track record, and competitive positioning.
- Angel investors – Angel investors may not wear wings, but they may be willing to wear more risk than a traditional investment firm. These investors work in close-knit networks and tend to fund ventures closer to home. To successfully bid for an angel investment, seek an investor who knows your field or with whom you connect personally. A tight business plan that revolutionizes your industry and projects more than average returns, and a reliable team of doers, will go a long way toward sweetening the deal.
- Friends and family – Nobody knows and loves you like your family and friends. These are the people with whom you most enthusiastically share your passions, and they understand both your strengths and weaknesses better than any outside investor ever could. That can make their investment into your company extremely easy…or extremely difficult. There is always a different element of risk when dealing with loved ones and money, so if you pursue this route then be particularly careful to put every element of the transaction on paper. Consult an attorney to draw up the necessary contracts spelling out the amount of the investment, what rights your friend or relative has to the company and its assets, and the terms of repayment or royalty (if any). Don’t be lulled into complacency by the closeness of your relationship; instead, put business first and protect the rights of everyone involved. You could save your company and your relationship from ruin.
- Invoice factoring – Last, but certainly not least, invoice factoring is an alternative financing method in which a factoring company purchases your open invoices and advances you a percentage of the money directly. Because funding is based on your accounts receivable, there is no liability on your balance sheet. Factoring invoices can help you build your credit by using immediate cash flow to pay your expenses on time. Your funding potential is only limited by your own sales – as your company grows, so does your available line of credit. Another benefit of invoice factoring is that your credit is not used as the basis for funding decisions. Rather, the factor weighs the creditworthiness of your debtors to approve you for funding. Factoring debt is different from loan debt. If you have made a practice of working with established, relatively well-paying clients, you should have little difficulty securing a factoring contract.
Depending on your company’s situation, you may find any or all of these options worthy of consideration. A denial for a bank loan is only as big a setback as you choose for it to be, so use every resource at your disposal to raise the capital to run your company.
Factor Finders provides funding support to temporary staffing agencies in a variety of industries. Learn more about our factoring programs for staffing companies.
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