Funding Options for New Enterprises
How you finance your business can become the difference between profit and loss. In a recession-plagued environment, it makes sense to tap into different funding sources for your business. This may sound like a hassle, but such a strategy will greatly reduce the company’s cost of capital and save it from bankruptcy. Here are some sound methods through which a business can raise capital:
Think About Factoring. Raise quick money by selling your receivables at a discount. The invoices can be for anything, right from manufactured goods to medical services. Some banks have factoring divisions. You can also Google search private factoring firms. However, this is an expensive way of raising money as factoring firms typically charge a fee that’s a percentage of the total loan amount.
Apply For Bank Loans. Though lending standards are more strict now, bank loans are the safest and most secure way to raise funds. On the other end of the spectrum are credit card loans. The writer agrees this is a dangerous route as a default would pull the curtains on the business. However, it’s quick money and when managed properly, can help the business tide over an immediate cash crunch.
Use Microloans. If you don’t have a credit history or collateral, apply for a microloan. This is a small business loan ranging from $500 to $35,000. Micro lenders also require less documentation than banks and often apply a more flexible underwriting criteria. The only hitch is they usually charge higher interest rates than traditional banks.
Launch Crowdfunding. In recent years, crowdfunding has become an effective way to raise finances at a low cost. You set a target amount to be raised over a period of time, then your friends, family, and even strangers pledge money for your cause. Crowdfunding is, however, not meant for the long-term. People who use crowdfunding websites, like Kickstarter or GoFundMe, usually aim to raise money for one-off projects.
Seek Out Angel Investors. When pitching to angel investors, follow these rules: Avoid jargon, present a sound business plan, have an exit strategy, hire experienced people, and display your expertise in the field. Angel investors usually invest at the early stage of the company in exchange for a 20-25% return. Many prominent companies like Google and Costco had angel investors. Even if you don’t hear back from a potential investor, fret not. Keep in touch as they may become interested at a later stage.
File For A Grant. Research-based businesses may apply for government or private grants. The winners are expected to meet the government’s R&D goals and also have huge potential for commercialization.
Raise Money From Kith & Kin. When starting a new enterprise, it’s natural to approach your family and friends for small loans. Ensure to supply them with a formal financial projection and when your loved ones can hope to receive their money back. Remember to make the terms (equity investment or a loan) clear. Most important, emphasize the risk involved so that your family members can make informed decisions.
Nithya | Contributing Writer