Last month, I briefly introduced the two main categories of funding a startup business may access. They are either debt or equity. While an entrepreneur’s first impulse is to seek a loan from a financial institution, the reality is that banks will not touch a startup until they have been in business for about two years, have a couple employees, or are averaging about $250K in annual revenues. A local or community bank will sometimes have a special time-limited program specifically designed to encourage small business innovation and growth, but such programs are few and rare. I am not referring to the SBA program but one the bank would have created based on their portfolio’s asset and liabilities needs. I know one local community bank here in Gainesville with such a unique program.
Let us brainstorm funding in a bit more details so you can have some additional funding ideas. Publisher Thomson Reuters provides us a handy list of private sources of financing for consideration:
- Personal sources: Consider liquidation of saving accounts, stocks, or bonds, obtaining mortgage or home equity line of credit on residences, personal lines of credit, or taking loans against the cash value of life insurance policies. An acquaintance of mine started his business using his 401(k) pension funds. However, seek a professional advisor if considering this option as it has some complex tax rules to comply with.
- Partners, stockholders, or employees: Current partners and stockholders may be willing and able to make additional equity contributions or loans to the business. Locally, I have heard where some employees have taken limited or no compensation, or contribute part of their earnings for an equity stake in the business. I commend them for their risk-taking and supporting the founders. However, make sure the chemistry provides the right fit.
- Social or family connections: These funds are normally in the form of a loan with reduced or zero interest rates. To avoid misunderstandings or conflicts later, I strongly suggest memorializing the terms of the transaction in a written agreement or IOU. Business and friendship should not be mixed but clearly delineated.
- Vendors: In order to expand sales, some vendors may be willing to extend the new business a line of credit or favorable payment terms. One of my past clients in the used car industry, used floor planning successfully to finance his car inventory. Take a look at your specific industry to find the customary funding options available and use to fill that cash shortfall gap.
- Customers: They may finance the business in the form of credit or payment terms favorable to you. Customers may provide an advance deposit or down payment to secure a purchase. Earlier, I attended a workshop at the CIED by Dr. John Mullins, who wrote the book, The Customer-Funded Business that provides five different models you can use to start, finance, or grow your business with your customer’s cash. It is a great read.
There are many other options an entrepreneur can consider for short-term, medium-term, and long-term funding but I must close for now. Feel free to contact me to discuss these and other business ideas.