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startup

Here are the best ways for funding a startup

Researching how to fund a startup can be an arduous task. Many start the process by “bootstrapping”, which is the exact opposite of funding. It essentially means the entrepreneur uses their own savings to fund the business. There are many companies that have successfully launched using this strategy before taking on investors. For example, MailChimp and AirBnB founders both used bootstrapping to launch their ideas. Although as funding options go, bootstrapping tends to be a less-popular choice, as it generally involves more risk.

If access to cash reserves or savings is limited, we recommend these five alternatives to consider for funding a startup:

Crowdfunding

This is one of the newer ways to secure funding and it has recently taken the entrepreneurial world by storm. Popular platforms like kickstarter or Indiegogo are great examples of websites that allow users to create crowdfunding campaigns.

Here’s how it works: an entrepreneur will post a detailed description of his/her business on the platform of choice along with the goals of the business, future financial strategies for turning a profit, the target audience, how much funding they require and the reasons. Anyone can contribute money toward helping a business that they believe in. Generally, those giving money will make online pledges with the promise of pre-buying the product or service. While there are many advantages to this tactic, competition is widespread, so startups need to make an idea stand out from the crowd in order to attract the crowd.

Venture Capitalist Funding

Venture capitalists specifically look for startups to fund. For many businesses this option is ideal, as venture capitalists have a lot of money at their disposal and plenty of resources readily available to help companies succeed. On the flipside, the business owner can end up giving away a considerable percentage of the company, and the underwriting and funding process can take longer than anticipated.

Angel Investor Funding

Angel investors work similarly to venture capitalists except their operations are much smaller, sometimes only one person. Like venture capitalists, angel investors will often want a large portion of your company, e.g. owning 49 percent of your company is not unheard of with an angel investor.

Credit Cards

If you have excellent credit history you may be able to use it to establish a line of credit to help fund your startup. There are specific credit cards designed for entrepreneurs, so visit your bank to learn about the options that may be available. While a line of credit is a way to access funds quickly, it can have a negative impact on your personal credit, especially if you find yourself unable to make timely payments.

Factoring

Factoring is one of the oldest forms of financing. Factors offer lines of credit like a bank, except a factor will underwrite the credit quality of the company’s customers, not the company. Everything comes at a price when it involves financing a startup, and factors will need to see a return on their investment. They charge a fee instead of an interest rate, and you can expect it to be comparable to a cash discount. One of the major benefits of factoring is funds can be available within five to 10 business days of receiving your application. Factors are lenders who don’t require equity and they can grow your credit limit as your business grows.

While any one of these options will traditionally lead to secured funding, we encourage you to continue working on your idea, even if you don’t initially succeed in getting the monies needed. If you’ve exhausted all of these avenues, it may be worth pitching your idea to friends and family, but remember nothing kills a relationship like money so give it serious consideration first.

Entrepreneurs are typically thick-skinned individuals who are accustomed to having the door shut in their faces many times before getting a positive response. If an idea is a good one, and it’s marketable, through hard work and perseverance, funding will be attainable, and the business should come to fruition.

Prepare loan package, secure loan

Show Me The Money: How To Prepare A Loan Package

The current state of the economy has left companies of all types and sizes in need of cash to keep their doors open, to maintain and to grow. Unfortunately, securing a loan can be tough; and while there are other options, in all cases, you need to be prepared.

If cash flow is tight, you are having difficulty making payroll and/or purchasing necessary materials or equipment to expand production and increase sales, there are three sources you may want to consider: a traditional bank loan, an asset-based loan or factoring. All can provide necessary cash; the difference is in how you qualify and how the repayment is structured. The key is determining what will work best for your business and then how to prepare to qualify for the optimal solution.

The traditional route

Bank loans are a good source of capital for mature businesses with a proven positive cash flow. The credit decision is based on historical cash flow of the business and the personal credit of the owner, since the bank is repaid with cash flow from the company.

To secure a bank loan, the lender will want to know the reason for the loan, the specific amount of money needed, the age of the business, the business’s assets, the number of employees and the legal structure. In addition, they will ask for the following:

  • Financial statements: Income statements and balance sheets for the current year and the past three years, as well as tax returns for the company and its owner.
  • Management profile: Prepare a short statement that is focused on each principal in the business, as well as the owner’s personal financial statements and those of the principal business owners.
  • Market information: State clearly the products of the company as well as its markets. Name the competition, and explain the company’s plan to compete in the market and satisfy the needs of its customers.

 

When cash is low, assets high

Asset-based loans are a good source of capital for companies with little cash flow but a large amount of assets, both accounts receivable and inventory. Because this type of loan is tied to assets — if the company is unable to repay the loan — they risk losing their assets.

For asset-rich companies, the benefit of an asset-based loan is more funds may be available because it is not based strictly on the anticipated levels of cash flow. Additionally, the structure often requires fewer covenants, providing more flexibility for many borrowers.

To successfully qualify for an asset-based loan, the company will need to provide a potential lender:

  • Financial statements and tax returns for the past three years
  • Detailed reports of the accounts receivable, accounts payable and inventory
  • Purpose of the loan and a business plan that documents the owner’s dedication, training and experience necessary to operate asuccessful business
  • Investment of 25-50 percent of savings or personal equity into the business

 

Factoring in the equation

Companies faced with a cash-flow squeeze and slow-paying customers, selling invoices or accounts receivable to specialized companies called factors can be an optimal solution for securing cash needed to grow.

Factor loans can be a good source of capital for high growth or start-up companies. The factor advances most of the invoice amount, usually 70-90 percent, after reviewing the credit-worthiness of the billed customer. When the bill is paid, the factor remits the balance, minus a transaction (or factoring) fee.

Factoring can provide the most cash flow of the three options because the factor is looking at the credit worthiness of the company’s customers, not the company’s current and past financial performance.

To secure a factor loan, a company will need to provide:

  • A detailed list of accounts receivable and accounts payable with samples of invoices
  • Current and historical financial statements and tax returns for the previous year
  • Business organization documents

 

Each of these loan sources bases the credit decision on different criteria. Understanding what information the lender looks at to base the decision will allow your company to prepare what the lender is looking for and, in turn, the lender will be able to make a faster credit decision.