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Finding Money to Jumpstart or Up-Level Your Business

If you are thinking of starting a business or trying to grow an existing small business, you almost certainly will need money, which can come from one or several different sources. Depending on timing, your circumstances and the opportunities available to you, not all sources may be appropriate for your business.

Money infusions can come in many forms: debt, grants, savings, income from another source, sale of assets, business income, and equity. The first five can be used for both getting a business off the ground or taking your business to the next level. Business income and equity are usually reserved for established businesses, since it’s hard to sell equity in an idea only, without a proven track record of performance or a tangible sample of potential. For the latter, think of the first major financial investments in Facebook. Although the company had yet to earn revenues, there was sufficient proof of potential based on the model and number of users at the time.

Debt

You take on debt when you borrow money, and usually pay interest on that investment… depending on your lender. For example, the bank of mom and dad may not be stringent on your repayment terms like a conventional lender, bank, government agency or other formal establishment that lends money. Friends could be another source of funding, although borrowing from family and friends are my least favourite options. If you go this route, make it official: draw up a contract that outlines the amount and details of the loan, repayment terms and interest charges. And stick with the terms in the contract. Treat the contract and your lenders with respect. Don’t think that since they are close to you, they will be okay with you skipping a couple of payments. Taking advantage and being taken advantage of financially will sour a relationship faster than you can squeeze a lemon, and the wounds will sting for a while to come. Treat the loan as formally as if it was given to you by the bank.

Most new businesses don’t start with a bank loan. This isn’t a popular way to finance a new business, and these loans are often provided based on a personal guarantee from the borrower, using something as collateral against the business loan, such as stocks, home equity or other investments owned by the borrower.

Credit cards and lines of equity are popular forms of borrowing to jump-start your business. Lines of credit are the preferred of the two, as the interest charges are usually lower than credit cards. You can use a combination of both; use the credit card for purchases and pay it monthly with the line of credit. If you have an existing business with steady or growing sales, you are in a good situation to negotiate with your bank or credit union about getting an operating line of credit.

Borrowing to start your business can be a smart and for some, the only way they can fund their business. I post a note of caution here. Be realistic about what you can afford to pay back. Cash from debt can make you feel falsely richer than you are, and many people fall into the trap of mistaking deft funding for free money. As a consequence, they put less value on this money than if it came from another source… say, hard-earned savings. You may end up borrowing more because you’re spending more. This can set you up for difficulties as you may not have the means to easily pay the financing charges back if sales are slow. The more you owe in debt, the less freedom you have financially and emotionally.

As is recommended advice for all small business owners, keep the money you borrow for business and what you borrow for personal use separate at all times. You can write off, or deduct, the interest and credit-related expenses you pay on loans, credit cards and lines of credit from formal organizations. If you borrowed from family and friends and you want to deduct the interest expense, be sure they claim the interest as income (which they should).

Grants

Small business grants awarded by governmental departments, organizations and agencies are beneficial in that they do not have to be paid back! There are several grants available for businesses yet many people do not take the time to look for them. There are additional grants available if you are a woman/women-owned or majority (51%+) woman/women-owned small business. The application process does take time and energy. The key is if you apply for a grant saying you will use the money to buy office equipment, buy the equipment with the grant. Don’t go on holidays with the money. If you do and they find out, you might be asked to repay the money, and you will thwart your chances of getting grant money in the future.

Personal or Business Savings

You may not need to look further than your bank account. You may have enough cash stashed away to pay for start-up costs and business incidentals before sales roll in. This is a good alternative for businesses requiring little start-up capital (money), such as a solopreneur consulting business.

If you have been putting aside money from your business sales for a rainy day, this would be that rainy day!

Income from Another Source

If you are taking the first steps to launch your business while still working your day (or night) job, congratulations! Although this may cost you in time and possibly energy by juggling a day job with working on your business, your stress levels and blood pressure are probably thanking you right about now. What you don’t carry is the stress of worrying how you are going to pay your bills.

Go ahead, dream big!! Here’s the BUT… Although it may be tempting to quit your job before you’ve launched or established your business, just remember Murphy’s Law of business launching: your business will take longer to get off the ground than you anticipate and revenue will be slower and lower than you thought. Consider your current income not as a by-product of a less-than-ideal situation, but rather steady funding for your business. The best part is, it’s not a loan. You don’t have to pay this money back!

Other possible sources of income are dividends from investments, or income from other assets such as rental income.

If you aren’t earning job income or you are already in business, income from a spouse, if there’s one in the picture, is a good alternative for business funding. Make sure they know they are funding your business and agree to it! Pilfering from your joint account without their knowledge is less than perfect karma. Seriously, it’s much better to have your spouse on-side, as they could be your biggest cheerleader.

Sale of Assets or Household Items

This one is self-explanatory. Do you have something you can sell to raise cash? It could be anything from selling a family car that isn’t needed, investments or unnecessary household items and having a garage sale or using eBay to generate cash.

Business Income

Don’t businesses use their business income to grow their business?? Well, not always. For solopreneurs, they often see the business income as their personal income. After spending on themselves, there is nothing left for the business. Be disciplined with business income and divide it into accounts to cover upcoming business expenses, taxes and re-investment. Pay yourself a regular salary or owner’s draw on a consistent basis, to avoid dipping into the business funds to cover personal expenses whenever there is money in the business account. This is a real no-no if your business is a C-corp (US) or a corporation (Canada).

Another way to use business income to fund expansion is an infusion of cash through sales. Do you have products you can fire sale and a good marketing system to attract a flood of sales within a short period of time? This would be especially ideal if you sell digital products and market online, because there are no additional costs to manufacture more products. With good promotion and a referral or affiliate network, you can give your income a quick boost. And, if you capture leads on your site during the purchase, you also grow your list, which will reap you rewards in the future.

Equity

Selling shares in your business is an option for some business owners. This is where you divide the ownership into units, called shares, based on the current overall value of the company and an investor — either a family member, friend or someone interested in investing into your business — buys into your company, so they get “shares” or a share of your company. In exchange for the investment, they get their share of profits. This will work if your company is a registered corporation. If you are a sole proprietor, you may take on what is called a “silent partner” which is someone who contributes money to the business and is listed as a partner but does not contribute to the management of the business. You will have change your business structure to a partnership

I suggest looking at the equity option as a later resort. If you have a business vision and are committed to reaching your goals, shareholders and partners may stop being silent if they are well-intentioned but disagree with your methods. Suddenly you have to answer to others and not only would this throw you and your business off track, but you may find it difficult to have to listen to someone else when you have been in charge for so long.

Which Option is Right for You?

You might decide to go with one or a combination of funding options. The keys are to assess where you are in your business, where you want to go and what options you are comfortable with. What fits best with who you are? What does your gut tell you?

 

1 Comment
  1. eBay is so good. When you’re running a business and need cash you tend to think of traditional ways to raise money but this is one that you seem to associate with your personal life. While they charge fees to list items over 99p, it is really worth doing to add some money to the pot.

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