by Teresa R. Martin, Esq.
Financing is indeed the most crucial of the puzzle for almost every business. Unless you have access to enough capital to bootstrap your business or raise it from family and friends, chances are, you’ll need a loan or investments.
When a conventional bank loan isn’t right for you, or if you’re looking for an additional injection of capital to grow your company, there are plenty of other options. Here are five alternate ways to finance your startup or grow your small business.
This is money loaned by a spouse, parents, family or friends. A banker considers this as “patient capital”, which is money be paid later as your business profits increase.
When borrowing love money, you should be aware that:
- Family and friends rarely have much capital.
- They may want to have equity in your business: Be sure you don’t give this away.
- A business relationship with family or friends should never be taken lightly.
As with borrowing money from friends or family to buy a business, some might consider using money from a retirement nest-egg risky. That said , it can often be an effective way to invest in your entrepreneurial endeavors for more and more of today’s business buyers.
As laid out by the government’s ERISA law, you can invest your existing IRA or 401(K) funds to the purchase of a business without taking any early distribution and incurring penalties.
It’s even possible to combine money from your retirement fund with loans and other funding methods for greater flexibility. Many entrepreneurs choose to invest in a business they control because they believe the growth opportunity is greater; and they want to diversify a portion of their retirement holding outside of the stock market.
Angel investors invest in early-state start-up companies in exchange for a 20 to 25 perfect return on their investment. They have helped to startup many prominent companies , including Google and Costco.
Angels are generally wealthy individuals or retired company executives who invest directly in small firms owned by others. They are often leaders in their own field who not only contribute their experience and network of contacts, but also their technical and/or management knowledge.
They tend to finance the early stages of the business with investments in the order of $25,000 to $100,000. Institutional venture capitalists prefer larger investments, in the order of $1,000.000.
In turn for risking their money, the reserve the right to supervise the company’s management practices. In concrete terms, this often involves a seat on the board of directors and an assurance of transparency.
Angels tend to keep a low profile. To meet them, you have to contact specialized associations or search websites on angels.
Increasingly today’s more business-for-sale transactions are resting on a seller-s willingness to finance at least part of the sale. In a deal that includes seller financing, the seller takes part of the purchase price in cash and the remainder in the form of a promissory note that the buyer will pay back with interest over a period of three-to-five years.
This has become essential; buyers are having difficulty accessing funds through traditional methods, therefore there’s a natural gravitation toward seller-financed business to help offset some of the cost upfront.
Conversely, sellers who continue to say no to seller financing are finding it difficult to close a deal, and as more of them have realized this, there has been an increase in seller-financed businesses on the market. If you’re in the market for a small business it’s important to be aware of alternate funding options, but know that in some cases it’s still possible to borrow from a bank.
Government stimulus and bank policy have been trying to promote ongoing small business lending, although many banks are still more conservative than they used to be about when and to whom they’ll loan money.
Crowdfunding sites such as Kickstarter and Idiegogo can give a boost to financing a small business. These sites allow businesses to pool small investments from a number of investors instead of having to look for a single investment.
Make sure to read the fine print of different crowdfunding sites before making your choice, as some sites have payment-processing fees, or require businesses to raise their full stated goal in order to keep any of the money raised.
Today’s business-for-sale marketplace is full of exciting opportunities that will allow you to take your destiny into your own hands and with various options available there’s no reason to let a shortage of traditional capital sources get in the way of your dreams.
ABOUT THE AUTHOR
Dr. Teresa R. Martin, Esq. is a motivational speaker, author, million-dollar real estate wealth coach, business strategist, and legal counsel. She is living the life she loves and an teach you how to do the same!
As founder of the Generational Wealth Zone Group, Teresa R. Martin formed the original vision for a group of companies that would help clients create, manage, protect and grow their wealth. She is dedicated to showing individuals and entrepreneurs how to become financially empowered by turning the work they love into a profitable and sustainable business.