Seeking cash? Start with personal and debt financing
- January 27, 2011
Starting out with “bootstrap financing”
If you are a new business owner, your means for raising capital may seem risky — but it will be impossible to persuade lenders or angel investors to spend money on you if you aren’t willing to spend your own. Most startups rely on:
- Savings. Think personal bank accounts, stock portfolios and even retirement savings.
- Family and friends. If your family members and friends are willing to invest some money into your business, you can do this without much paperwork or legal concerns. However, consider what will happen to these relationships if you are late or unable to repay them.
- Credit cards. If you choose this route, make sure you find low-interest credit cards and become familiar with the terms of each card.
- Home equity. This may seem risky, but it’s an easy way to raise thousands of dollars quickly.
Subtract the amount you can personally invest in the business from the capital you have determined you will need to start and run your company. This is the amount you will need from outside sources.
Under this type of financing, loans are repaid over a set time period with interest. Under these loans, business owners do not give up any ownership of their company. Loans often are considered short term, less than a year, or long term with a repayment period of up to seven years.
You need to prove to lenders that you have a solid business plan and a detailed outline of anticipated expenses needed to get your business off the ground and keep it running. Lenders will consider your:
- Business idea and plan
- Personal investment in the business
- Credit history and personal net worth
- Conditions that could affect your success (industry, economy)
- Character and commitment to the business
There are many different avenues to secure debt financing, some tougher than others. The following are various lenders businesses should consider:
- Commercial lenders. Banks know that lending to small businesses is risky. To obtain a loan, the bank will require collateral, a good credit history or a guarantor of the loan. Often, a personal guarantee is required to secure the loan. The U.S. Small Business Administration and the Virginia Small Business Financing Authority offer guarantees to lenders to encourage them to make loans to small businesses.
- Loans from friends or relatives. Make sure loan terms are put in writing.
- Equipment purchases. Sellers of large equipment often will allow payments over time rather than upon sale. Some furniture and equipment companies offer repayment schedules that don’t start until a few months after the purchase. These can be beneficial for a startup company.
- Accounts receivable financing. Under this arrangement, business owners sell their outstanding accounts receivable (invoices from customers) to banks or businesses (factors) for a certain percentage of the money due. This allows for a fast infusion of cash.