Cash is essential to get your dream business off the ground, and also plays the most important role in defining its future success and growth. Small-business owners and entrepreneurs multi-task, and have infinite things on their mind at any given moment.
Despite its importance cash-flow management often fails to get the attention it deserves. Client acquisition, investor management, product development and team building clamor for quick action and immediate attention. The entrepreneur does not realize that he’s short on cash until it’s time to make payroll, and financial panic ensues.
Money is also required to ensure that your fledgling business is capable of handling clients you have worked so hard to acquire. You need to invest meaningfully in your system and people to impress your valuable and big-ticket clients. And this is not easy for startups because traditional financing is hard to come by, and further equity dilution is not preferred.
Seasonal fluctuations in sales, unpaid invoices or a sudden unforeseen expenditure all have the potential to tilt your cash flow off balance. Entrepreneurs face these kinds of situations all the time and you too have to overcome them.
If you need money for your business, the first thing you need to do is stop having a breakdown, and take a proper look at the many options you have. One of them will surely work for you, as it has for many others.
Here are a few sources available for you to raise money.
Business Cash Advances
Business or merchant cash advances will help you meet emergencies and provide you a breather till revenue comes in. This type of financing is usually provided by merchant account companies and online payment service providers where the business owner is able to raise funds on future credit card transactions.
When you take a business cash advance you will enter into an agreement with the advance company to pay back an agreed upon amount which will also include a fee for the advance. The lender will take a percentage cut from each future credit card sale receipt till the full amount is recovered.
Traditionally this has been viewed upon as an expensive lending option with high rates of interest, but now there are many options with attractive terms and fair fees. If you accept payment cards, this lending option will help you leverage your future sales and get the much needed cash.
Grants and Government Aid
Do not overlook the grants and financial aids that your local government and community organizations offer. They may not be very much but do provide financial help to hard-pressed entrepreneurs.
Since the grants and loans are essentially tax money, the rules and regulations are stringent. Non-profit businesses and other socially relevant ventures qualify for grants. Small businesses and new ventures can access financial assistance programs that will help connect them with commercial lenders.
The Small Business Administration-guaranteed loans will offer benefits like lower down payments and longer repayment periods. This will help you manage cash flow better without having to spend big on debt repayment.
Bank loans used to be really hard to get, but with better economic climate and a recovering market, this might be the right time for you to try for one. The process of applying for one can be laborious and involves a lot of paperwork, but you get loans at competitive rates of interest and enjoy fair repayment requirements.
Banks prefer to lend to small businesses that are stable and growing. You need to have a good credit record, and will have to present a detailed and clear business plan, and list future growth prospects. Your financial data should be in order and must have a revenue stream in place.
If you have a good relationship with the banks and financial institutions you do business with then you will be able to consult them when you are in need of financial help. Your banker will know about your needs and can advise you regarding suitable loans and lending options.
Good credit record and payment history will work in your favor. Most banks require financial data at least a couple of years old and will scrutinize the credit score of both the business as well as the entrepreneur. You will also have to furnish collateral to guarantee the loan which in an overwhelming majority of cases is the entrepreneur’s home ownership.
Remember that your borrowing is based on the collateral, and not on your business ideas.
Banks prefer not to lend to startups because they are deemed too risky to invest depositors’ money in, but that perception is slowly changing and there is no harm in trying your luck.
With the demand for business financing going up and traditional methods becoming less accessible, alternate lending options have grown in popularity.
Crowdfunding sites help you raise money for your dream project where you can reach out to people interested in investing in your idea. The most popular among crowdfunding sites is Kickstarter which is suited for launching creative projects like documentary production, publishing a book etc.
There are sophisticated lending sites like Prosper and Kabbage which have strict qualification criteria and due diligence processes. But if you manage to jump through the hoops you can gain funding in hundreds of thousands dollars.
If you are looking for loans to fill gaps in cash flow until your invoices are paid, or for purchasing equipment for your new venture then microloans will work well for you.
These loans are for short term and are so small that banks do not find them profitable enough to invest their underwriting and due diligence work on. Micro lending institutions are often community, industry or region-focused and many are not-for-profit organizations.
There is less paper work involved and offer more flexibility in eligibility criteria. The interest rates are slightly higher than that charged by banks but gets you the much-needed cash in a short span of time.
Factoring helps you raise money when your working capital is caught up in accounts receivable.
You can sell your unpaid invoices for a discount to the factoring company and take a cash advance on it. Invoice factoring is of two types –recourse and non-recourse. In recourse you do not transfer the risk to the factor, so you are liable to pay back the full amount if your customers do not pay eventually. In non-recourse the factoring company takes on the risk of default by customers, and cannot come after you to recover the loss. Predictably, the interest rates are higher in non-recourse invoice factoring.
Asset-based lending gives you access to secured loans where interest rates are lower. Your balance sheet assets like inventory, accounts receivable and other assets excluding real estate are used as collateral for the loan.
Online auction platforms like CBAC Funding help you sell your invoices to the highest bidder. You can review all bids and choose the one that has most favorable terms. There are sites that give you the freedom to sell one invoice at a time or as a bundle. The Receivables Exchange allows you to offer your accounts receivable to a variety of buyers including hedge funds, factoring companies and banks.
Raising cash for your business requires you to be very careful. Always raise money from ‘good sources’ and do not take money that will make it difficult for you to shut your shop and walk away, if any day you feel so.
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