Published By Janet Gershen-Siegel at September 17, 2018
Written by Janet Gershen-Siegel
Looking for business funding? We show you how to hack into a number of alternative funding sources to get your company the cash it needs.
Have you got a business? It can feel like a money pit sometimes, can’t it? While that is a relatively typical issue with small business owners, it does not have to be like that.
You should count on to put some of your own money into a new business in particular. But that should not be the sole place you turn for financing. In order to help you out, here are other ways of funding your company which don’t involve rooting through your couch cushions, looking for loose change.
These are not quite the same thing.
An angel investor will usually invest in early-stage or startup businesses in exchange for a 20 – 25% profit on their investment. Angels tend to be a lot more informal. They can be people you know. Or they can be people you connect with through networking or other means. And yes, your mom can be an angel investor.
Venture capitalists will give money in order to help establish new startups which the VCs strongly believe have both high growth and high risk potential. These can be fast-growth businesses with an exit strategy already in place, and they can get up to tens of millions of dollars for investment, networking, and building their business.
Essentially, this is a gamble on possible future profits. Also, venture capitalists will typically plan to recover their investment within a 3 – 5 year time period. They will also, normally, wish to get a portion of your business if not a controlling stake. So recognize that.
You might want to try a company like Kickstarter. However, make certain you read through the fine print, as many crowdfunding platforms will demand that you give all the funding back if you do not make your objective by the end of the crowdfunding project. Note: Indiegogo has a flexible funding option.
Also, crowdfunding platforms will take a percentage of the donations, and they commonly will urge to have you deliver on your commitments. So you’ll need to actually manufacture that electric spaghetti twirler or anything else your company is supposed to be doing.
Donors can become weary of crowdfunding spiels, and uncomplicated startups might not do so well. Crowdfunding has the tendency to work best for scenarios where the contributors can personally connect with the product or service, so products which aren’t quite on the shelves yet, or creative ventures, can do well.
But everyday gizmos which are not about to truly change will not be able to attract brand ambassadors. And, by extension, they probably won’t get donors too fired up.
Another alternative is invoice factoring, where your company gets a percentage of the cash from uncollected bills fronted by the factoring company. The factoring company then goes directly after any company which owed you money, and collects on it themselves.
Hence if a seller owes your business $1,000 on a twelve-month repayment basis, you might hand that invoice over to the factoring company in order to get something like $950 in a week. The factoring company would then collect the full amount from the retailer.
This allows you to extend credit or negotiate longer-term payment plans in exchange for other, more favorable terms. These can include getting a merchant on board with a new company.
And you can do so without keeping a lot of what are effectively IOUs for months at a time.
There is also the SBA, which has numerous CAPLines loan programs and SBA Express, among other loans. They do not provide the loans; instead, the SBA establishes loan guidelines. It’s their lending partners who really make the loans.
The SBA also offers research grants if your business performs scientific research and development. Note: many companies will not qualify for an SBA loan, but it never hurts to check.
An additional option is the microloan, which you can’t even get from a regular lender. Instead, you get a microloan from a microlender. Try the Association for Enterprise Opportunity to locate a nearby microlender.
A microloan is exactly what it sounds like; it’s not a lot of cash. Still, if your company only needs something like $500 – $35,000, then a microloan could do the trick.
Do you need much more than a microloan? Then request a small business loan for your company. Be prepared to put up collateral, which might be stock or real property or the like. Loans must be paid back promptly. Otherwise, your company’s credit rating will drop.
Another alternative is business credit cards. However, know that business credit cards must be paid off just like consumer credit cards.
A very high credit utilization rate of over 30% can lower your business credit scores and make it harder to borrow money or get another business credit card. Utilization rate is the amount of credit you use as divided by the total amount of credit available to your company.
So you ought to be vigilant with these and pay them off as soon as is practical.
Of course our favorite hack is business credit building!
Due to the fact that corporate credit is independent from personal, it helps to secure a small business owner’s personal assets, in the event of litigation or business insolvency. Also, with two distinct credit scores, a small business owner can get two separate cards from the same vendor. This effectively doubles purchasing power.
Another benefit is that even startup businesses can do this. Going to a bank for a business loan can be a formula for frustration. But building corporate credit, when done the right way, is a plan for success.
Personal credit scores depend upon payments but also various other factors like credit usage percentages. But for small business credit, the scores truly merely hinge on if a company pays its debts in a timely manner.
Establishing small business credit is a process, and it does not happen without effort. A business will need to proactively work to build business credit. However, it can be done easily and quickly, and it is much swifter than building personal credit scores. Merchants are a big aspect of this process.
Accomplishing the steps out of order will cause repetitive denials. Nobody can start at the top with business credit. For example, you can’t start with store or cash credit from your bank. If you do you’ll get a rejection 100% of the time.
A company has to be bona fide to lending institutions and vendors. For that reason, a company will need a professional-looking web site and email address, with site hosting from a vendor like GoDaddy. Additionally business phone and fax numbers ought to have a listing on 411.com.
Also the business telephone number should be toll-free (800 exchange or the equivalent).
A small business will also need a bank account devoted only to it, and it has to have every one of the licenses essential for operation. These licenses all must be in the particular, correct name of the company, with the same corporate address and phone numbers. Note that this means not just state licenses, but potentially also city licenses.
Visit the IRS web site and obtain an EIN for the company. They’re totally free. Choose a business entity like corporation, LLC, etc. A small business can begin as a sole proprietor but will more than likely wish to switch to a kind of corporation or partnership to limit risk and optimize tax benefits.
A business entity will matter when it involves tax obligations and liability in the event of a lawsuit. A sole proprietorship means the business owner is it when it comes to liability and taxes. No one else is responsible.
If you are a sole proprietor at the very least be sure to file for a DBA. If you do not, then your personal name is the same as the small business name. As a result, you can find yourself being personally responsible for all company financial obligations.
Also, per the Internal Revenue Service, using this arrangement there is a 1 in 7 probability of an IRS audit. There is a 1 in 50 possibility for corporations! Avoid confusion and dramatically decrease the odds of an Internal Revenue Service audit at the same time.
Begin at the D&B web site and get a free DUNS number. A DUNS number is how D&B gets a business into their system, to generate a PAYDEX score. If there is no DUNS number, then there is no record and no PAYDEX score.
Once in D&B’s system, search Equifax and Experian’s sites for the business. You can do this at https://www.creditsuite.com/reports/. If there is a record with them, check it for accuracy and completeness. If there are no records with them, go to the next step in the process. By doing this, Experian and Equifax will have something to report on.
First you should establish trade lines that report. This is also known as the vendor credit tier. Then you’ll have an established credit profile, and you’ll get a business credit score.
And with an established business credit profile and score you can begin getting retail and cash credit.
These sorts of accounts often tend to be for the things bought all the time, like coffee, shipping boxes, outdoor work wear, ink and toner, and office furniture.
But first of all, what is trade credit? These trade lines are credit issuers who will give you preliminary credit when you have none now. Terms are often Net 30, instead of revolving.
Therefore, if you get approval for $1,000 in vendor credit and use all of it, you need to pay that money back in a set term, such as within 30 days on a Net 30 account.
Net 30 accounts need to be paid in full within 30 days. 60 accounts need to be paid in full within 60 days. In contrast to with revolving accounts, you have a set time when you must pay back what you borrowed or the credit you used.
To begin your business credit profile the right way, you need to get approval for vendor accounts that report to the business credit reporting agencies. As soon as that’s done, you can then make use of the credit.
Then pay back what you used, and the account is on report to Dun & Bradstreet, Experian, or Equifax.
Not every vendor can help like true starter credit can. These are merchants that will grant an approval with negligible effort. You also want them to be reporting to one or more of the big three CRAs: Dun & Bradstreet, Equifax, and Experian.
But you may have to apply more than one time to these vendors, and you may need to purchase some things you don’t really need, to confirm you are reliable and will pay timely. Consider donating unwanted things to charitable organizations.
Once there are 5 to 8 or more vendor trade accounts reporting to at least one of the CRAs, progress to the retail credit tier. These are service providers such as Office Depot and Staples. These companies are more likely to have supplies you need.
Use the corporation’s EIN on these credit applications.
Are there 8 to 10 accounts reporting? Then progress to the fleet credit tier. These are companies like BP and Conoco. Use this credit to purchase, repair, and take care of vehicles. Make sure to apply using the company’s EIN.
Have you been responsibly managing the credit you’ve up to this point? Then move onto the cash credit tier. These are service providers like Visa and MasterCard. Keep your SSN off these applications; use your EIN instead.
These are companies such as Walmart and Dell, and also Home Depot, BP, and Racetrac. These are normally MasterCard credit cards. If you have 14 trade accounts reporting, then these are feasible.
Know what is happening with your credit. Make sure it is being reported and fix any mistakes ASAP. Get in the habit of taking a look at credit reports and digging into the specifics, and not just the scores.
We can help you monitor business credit at Experian and D&B for only $24/month. See: https://www.creditsuite.com/business-credit-monitoring. Update the details if there are errors or the details is incomplete.
So, what’s all this monitoring for? It’s to challenge any mistakes in your records. Mistakes in your credit report(s) can be fixed. But the CRAs typically want you to dispute in a particular way.
Disputing credit report errors commonly means you mail a paper letter with copies of any proofs of payment with it. These are documents like receipts and cancelled checks. Never mail the originals. Always send copies and keep the original copies.
Disputing credit report errors also means you precisely spell out any charges you challenge. Make your dispute letter as understandable as possible. Be specific about the problems with your report. Use certified mail so that you will have proof that you sent in your dispute.
Always use credit responsibly! Never borrow more than what you can pay back. Monitor balances and deadlines for payments. Paying off promptly and completely will do more to raise business credit scores than just about anything else.
Business credit is an asset which can help your small business for many years to come. Learn more here and get started toward growing company credit.
Leave the pennies in the couch cushions for another day and get your business financed the right way. Learn more here and get started with astonishing hacks for business funding that are proven to work.