Finding financing in any economic climate can be challenging, whether you're looking for start-up funds, capital to expand or money to hold on through the tough times. But given our current state of affairs, securing funds is as tough as ever. To help you find the money you need, we've compiled a guide on 10 financing techniques and what you should know when pursuing them.
A Step-by-Step Guide to Small Business Financing
Factoring is a finance method where a company sells its receivables at a discount to get cash up-front. It's often used by companies with poor credit or by businesses such as apparel manufacturers, which have to fill orders long before they get paid. However, it's an expensive way to raise funds. Companies selling receivables generally pay a fee that's a percentage of the total amount. If you pay a 2 percent fee to get funds 30 days in advance, it's equivalent to an annual interest rate of about 24 percent. For that reason, the business has gotten a bad reputation over the years. That said, the economic downturn has forced companies to look to alternative financing methods and companies like The Receivables Exchange are trying to make factoring more competitive.
The exchange allows companies to offer their receivables to dozens of factoring companies at once, along with hedge funds, banks, and other finance companies.
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These lenders will bid on the invoices, which can be sold in a bundle or one at a time. Read more on financing your business with factoring. Lending standards have gotten much stricter, but banks such as J. Morgan Chase and Bank of America have earmarked additional funds for small business lending.
Part 1: Build Up a Case for Your Business
So why not apply? Read more on what you need to know about filling out a loan application. Using a credit card to fund your business is some serious risky business. Fall behind on your payment and your credit score gets whacked.
Small Business Financing, Part 2: How to Borrow Money
Pay just the minimum each month and you could create a hole you'll never get out of. However, used responsibly, a credit card can get you out of the occasional jam and even extend your accounts payable period to shore up your cash flow. Read more on financing your business with a credit card. If you're unemployed and thinking about starting your own business, those funds you've accumulated in your k over the years can look pretty tempting. And thanks to provisions in the tax code, you actually can tap into them without penalty if you follow the right steps.
The steps are simple enough, but legally complex, so you'll need someone with experience setting up a C corporation and the appropriate retirement plan to roll your retirement assets into.
Remember that you're investing your retirement funds, which means if things don't pan out, not only do you lose your business, but your nest egg, too. Read more on financing a business with your k. Before you send out any applications, you should prepare all the documents , forms, and numbers that will explain what you do--and prove that you're doing it well. Most lenders will want to feel confident that they're lending to a reputable, legitimate, well-planned business, run by an entrepreneur who keeps records and plans ahead.
The better they feel about you and your business, the more likely it is those lenders will loan you money at better terms or at all. For example, you'll almost definitely need a photocopy of a government-issued identification card--like a driver's license or passport--just as a baseline. You also might get asked for your business licenses and proof of ownership, a franchise agreement if you run a franchise , the number of employees you have to get a sense of your size , your business's entity type and industry, and more.
You may want to prepare your business plan, too, if you think it will show off your entrepreneurial skill set, as well as your personal resume. This is just as important--for obvious reasons. Lenders will also want an answer to another question:. In order to show lenders that your business can handle the debt, it's a simple matter of gathering all the right documents in one place. These financials will illustrate how you manage the money that goes in and out of your business. In our previous post of this two-part series, we provided a simple three-step framework for thinking through whether borrowing money is the right tool for growing your company.
While there are a wide variety options to consider, accepting credit cards , merchant cash advance and term loans are three of the most common ways to borrow money for your business.
Most of you probably know about the credit card option, but may not have heard much about merchant cash advance or term loans. In a merchant cash advance, the provider offers you money and, in exchange, you agree to pay the advance plus predetermined fees by letting the provider take a portion of your credit or debit card sales each day until the entire amount has been paid. Term loans let you borrow money and pay it back over a fixed term, usually at a fixed interest rate. Credit cards are a good option for companies that have shorter-term needs. New businesses that have unpredictable performance and sell most of their products through credit card payments can use MCA to finance shorter-term projects.
Term loans are great for more established companies looking to fund longer-term investments at a lower interest rate. Online-based lenders Bond Street as an example often provide faster processes than traditional lenders: Many people believe comparing interest rates is the best way to understand the cost of borrowing.
- The Real Cost of Borrowing Money;
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To accurately understand and compare the cost of borrowing, you need to calculate the annual percentage rate, or APR. APR represents the total cost of all that must be paid to borrow the money —— including interest and fees —— divided by the amount borrowed, and measured over a constant time period annually. It provides a bottom line cost of borrowing number that you can use to compare different products and lenders, making it very helpful.
Though APR is calculated differently across products, all lenders should state the terms needed to calculate it, or quote APR directly as in the case of credit card companies.