Table of Contents
10 Dos and Don’ts of Financing Your Small Business …6
Traditional and Non-Traditional Ways to Finance a Small Business …13
Traditional Bank Loans ..13
Asset Relocation, AKA Selling Your Stuff ..13
Get a Job on the Side …14
PayPal Working Capital ..15
Venture Capital Funding 23
Your 401K or Retirement Plan ….24
Financing Your Business with Your Credit Cards …24
Family and Friends, Coworkers ..25
Top 10 Tips for Financing Your Small Business or Startup 26
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10 Dos and Don’ts of Financing Your Small Business
1. Don’t Be Nearsighted
Hey, we understand. You think you have an idea that absolutely cannot fail. All you need is a little money to get started, and you are going to take the world by storm. Your business idea is innovative and your product fills a need not currently being addressed in some marketplace. Guess what? None of that matters if you think short-term. You absolutely can’t be nearsighted when raising funds for a business startup. Leave no stone unturned in trying to figure out exactly how much money you will need to stay afloat for at least your first 3 years, and planning for 5 years is even smarter.
Once you come up with a figure, factor in an additional 10% or 15%. Have any other interested parties go over your calculations. Did you miss anything? Are there any glaring omissions you forgot to take into account? Thinking short-term (a few months, 1 year) reveals to venture capitalists and other potential backers that you may not be taking your business seriously. Raising just enough money to get up and running for the short-term only is a financing don’t for sure.
2. Do Evaluate Your Finances Regularly
Most large businesses perform quarterly reviews. They communicate with stock exchanges, their investors, and business analysts to let everyone concerned know exactly how they are doing. While passing along important financial information to interested parties is a smart business move, big businesses perform regular reviews for one very important reason … they want to constantly know where they stand financially.
Companies need market research, a strong infrastructure, happy employees, smart leaders and other resources to succeed. This is true for small and large businesses alike. Keeping all the spokes of the business wheel in place to ensure the company keeps rolling along means having easy access to liquid capital. Concerning your small business, it is vital to constantly evaluate its health, since your business will be closer to financial ground zero than a Fortune 500 company.
3. Don’t Borrow Too Early
This may not sound like a wise move. If your business launch is 2 or more years off and you happen along an attractive source of funding or a venture capitalist who loves your idea, you may be tempted to grab the money now. In the back of your mind, you believe it would be foolish to pass on any type of funding that is available, even if the capital will not be required for several years. In a lot of cases, borrowing money before you have a business plan and implementation of practices in place is a bad idea.
Imagine you are at the very beginning of planning your company and how it will run. You are creating products, performing market research, testing the services you are going to offer, and your launch is probably 24 to 30 months away. You are basically just getting started. You happen to stumble across a substantial funding offer. This will be enough capital for you to operate your business at a loss for breakeven point for several years.
You take the money, stick it in the bank, and go back to planning your business launch. Since you are just in the early stages of formulating your business, you are going to have dozens of ideas about what you want to do. After you do your research, you may discover that what looks like a smart business practice now won’t do your company any good in the future.
Unfortunately, if you have a bundle of money staring you in the face in the experimental phase of business development, you could burn up valuable capital because you are tempted to spend money on anything and everything while you have cash in hand. If you find an investor eager to finance your business, she will appreciate the fact that you want a solid and workable business plan in place before you get your hands on any startup money.
4. Do Borrow a Specific Amount
Only borrow what you need. Imagine that you have done a great job figuring any and every possible cost you are going to incur over the first 5 years of your business. You have taken into account the fact that you may struggle in the beginning. You are not relying on early success for money to keep your business afloat. You are instead planning for every possible penny you are going to need to give your company a chance to develop a sustainable position in your industry.
If that number is $100,000, don’t borrow $200,000 if it is offered to you. The business owner that knows exactly what money is required for startup success and ongoing operations should not arrange for excessive capital over that figure. There are too many things that can go wrong, even if you have conducted excellent market research. It’s okay to allow for a little wiggle room and calculate 10% to 15% over the amount of capital you’re going to need. Anything over that is dangerously excessive and tempting.
5. Don’t Obsess Over Your Interest Rate
You obviously want to secure a good interest rate or loan repayment particulars. Looking around for an attractive rate could save you thousands or tens of thousands of dollars. Sometimes obsessing over getting the best possible interest rate is a mistake. Having tunnel vision that takes your interest rate into account while blinding you to other financing considerations can cost you more money in the long run.
Do some simple math here. If you are not good at crunching numbers, get someone involved who is. If your low-interest rate is attached to a 20-year loan, is it really a smarter financing move for your company than securing a loan with higher interest that runs for only 10 years? Making sure you don’t get taken advantage of by a predatory lender is important, and the interest rate you will be paying on your loan is just one of several factors you should consider.
6. Do Prepare an Effective Elevator Pitch
You may be familiar with the business term elevator pitch. This refers to the following scenario. You find yourself in an elevator with a dream angel investor or venture capitalist that could make your business startup a reality. If you had to choose one individual to provide the capital you need to launch your business, that person is standing next to you, and the two of you are alone in an elevator. He may be exiting at any time. You only have a few seconds to present your business opportunity to this investor. What can you say in a few words or a simple sentences to grab this person’s attention? This is your elevator pitch. You need to know your business plan inside and out. Your pitch should be succinct and to the point, illustrate why your business is going to succeed where other similar companies have failed, and it should have a hook that draws in potential investors.
You have to convince someone in just a few seconds that you are a confident businessperson and manager, and that their investment will be a win-win situation for both parties. If your elevator pitch is strong, potential investors will be happy to sit down with you at a later date when they have more time available for you to go over your business proposal in detail.
7. Don’t Pay Money Back Too Quickly
This may sound crazy, but the idea here is that you simply can’t tell what the future holds. You have to have reasonable capital on hand to fix unseen problems that arise. Perhaps your business starts to succeed wildly out of the gate. Your first-year revenues triple your expectations. Everyone in your industry is talking about you in a favorable way, you find yourself on the cover of INC. Magazine, and your business success is all but guaranteed … or is it?
If you have secured a 60-month loan for your business and you can pay it off a couple of months early, that’s great. Just don’t go crazy with your early payment plan if it is not necessary to do so. Whoever you borrowed the money from agreed on certain terms.
That means they are happy for you to use the entire length of the loan to pay back the principal with interest. If you repay a loan much too soon and then some big financial crisis appears suddenly and unexpectedly, there may not be enough time to secure the capital needed to survive this cash crunch.Other Details
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