Options for funding a business abound. Apart from options explored in Part 1 of this blog post other options an entrepreneur or business could use to raise funds for the next project or order include:
1. Crowdfunding. Crowdfunding is a unique approach to funding a business. The name seems to explain what this is about, but there is more content to it than getting funding from a crowd. Usually, this resource refers to an internet platform where a business idea could get funded once the business or entrepreneur shows a track record of market for its product. Other requirements apply but are not discussed in this blog. For example, potential securities regulation and other applicable federal and state laws. Mark Easley, editor of crowdfundnc.com, at a seminar on crowdfunding organized by Co//ab, explained the idea of crowdfunding in a simple analogy: a pizza shop could source two hundred dollars ($200.00) from each of its five thousand customers for a stake in the business. The pizza shop would end up having one million dollars ($1,000,000.00) to operate new shops in other parts of town without using traditional funding means such as bank loans with higher interest rates.
2. Vendor Financing. Vendor financing is an option in a situation where all that is left for a business to meet a client’s order is the tangible product from the business’s suppliers or strategic partners. Usually a business has thirty (30) days to pay back its suppliers for supplies unpaid. However, with vendor financing a supplier agrees to defer receipt of payment until the products are sold. With good credit history, a business could choose vendor financing if it is willing to pay extra fee that suppliers usually charge for late receipt of payments.
3. Factoring Accounts Receivables. When a business has accounts receivable such that, if it had collected the accounts, it would be able to finance its next project or order, an easier route is to opt for factoring. With this option, the business sells its accounts receivables, at a price lesser than the amount due, to companies willing to pay the business before the accounts receivables become due. For instance, if a business has accounts receivables that would be due in thirty (30) days, the business may sell the accounts receivables for immediate funds, and the party buying the accounts receivables receives the account receivables when it is due. Interest rates for such financing are typically higher than traditional bank loans.
4. Purchase Order Financing. A business could get purchase order financing companies to provide funds directly to suppliers for purchases the business needs to make to meet an order.
5. IRA or 401(k). An entrepreneur could channel her or his saved-up retirement funds to fund the business that he or she is passionate about. However, this option is very risky because if things don’t go as planned all of one’s retirement might be squandered. Advice of tax counsel and/or legal counsel is a must here.
6. Credit Card. Using credit cards to fund a business is equally risky because using credit cards comes with the risk of compound interest. So, if the business is not able to generate enough funds to defray the credit borrowed, an entrepreneur could end up incurring more debt from compound interest on unpaid borrowings. Nevertheless, if the chances of making profit from the business is very high this could be an option when all others fail. Just be cautious and informed of the interest rate and compound interest risk that comes with this option.
References
“10 Ways to Finance Your Business” Inc., By Inc. Staff, https://www.inc.com/guides/2010/07/how-to-finance-your-business.html. Accessed 17 May, 2018.
“3 Startups Offer New ‘Microloan’ Options For Entrepreneurs With Big Ambitions” Startup Financing, The Entrepreneur, https://www.entrepreneur.com/article/235947. Accessed 17 May, 2018.
Zwilling, Martin. “10 More Creative Ways To Finance Your Startup” Forbes Entrepreneurs, 6 Mar. 2013, https://www.forbes.com/sites/martinzwilling/2013/03/06/10-more-creative-ways-to-finance-your-startup/#6fafa85232d9. Accessed 17 May, 2018.
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