By: Shaun McGowan, Lend
Getting a new business off the ground takes a lot of planning, hard work – and money. Unless you have savings you can use as seed capital, or personal assets you can put up as collateral for a secured loan, accessing that cash can be a daunting prospect.
Frustratingly even risk-tolerant fintech lenders won’t take a chance on a start up. Until you have six months’ trading behind you, an unsecured business loan is unlikely to be an option. In fact, although more than 50% of start up businesses need funding within the first 12 months, only 8% receive a business loan.
Shaun McGowan from business finance website lend.com.au has these four alternative funding options, where there’s every chance you’ll be able to secure the money you need to fund your business;
1. Use equity to finance your start up
One option is to look for someone who is willing to invest in your business. There are plenty of people out there who may be willing to buy a share in your business if your product and strategy are solid enough. Approximately 32.6% of start ups receive this sort of funding.
However, professional 'angle' investors do not invest lightly. To attract this sort of funding you’ll need to do extensive market research and produce detailed and compelling business and financial plans – and prove that you have the skills on your team to transform your grand idea into a viable business.
The biggest drawback of equity finance – other than the work involved in securing it – is that you’ll have to share control of your business. Investors will either make a direct capital injection in exchange for equity, or will offer convertible debt which gives them the right to convert their loan into stock at a later stage.
Either way, they’ll expect to participate in strategic decisions – although this can actually be a major advantage if you find an investor with skills and networks that can help to make your business a success.
2. Funding your start up using business finance
Small business loans aren’t the only form of business finance, and some types are available to new ventures that meet certain criteria.
With invoice factoring you can sell your accounts receivable to a third party, giving you almost instant access to cash rather than waiting for payment from customers. This can be a good way to boost your working capital, bridging the gap between sales costs (labour, materials, delivery etc) and payment if you offer credit terms to your customers.
Invoice finance providers are more concerned with the creditworthiness of your customers than with your own trading history, so if your customers fit the profile this form of finance may be available soon after you start making sales.
A merchant cash advance is another form of sales-based finance, specifically for businesses that make sales via debit or credit card (generally retail or hospitality businesses). With a merchant cash advance you’ll receive a lump sum loan and the lender will take a percentage of your daily sales until the loan is repaid.
The big advantage of this is that your repayments will be directly linked to your cash flow – but it tends to be expensive, and it’s only available to businesses that make a high average volume of daily sales.
A business credit card may seem like an easy option, but it’s vital that you don’t use a credit card for long-term purchases. Unless you can clear the balance each month you’ll pay hefty interest – and the facility may be withdrawn at any time. Famously Airbnb was started by it’s three founders maxing out credit cards until they were accepted in to Y Combinator.
3. Funding your start up using family support
Around 29% of Australian start ups have the backing of family or friends. This type of informal loan can have lots of benefits – usually the interest rate is far lower, and the repayment terms can be much more generous too.
The big drawback is that if something goes wrong, you could end up destroying your relationship – and have to live with the guilt of losing a friend or relative’s precious nest egg. If you do decide to seek help from friends or family, make sure that you treat the loan as you would any other borrowings – have a formal agreement and an agreed repayment plan.
4. Getting support from the public to fund your start up
Rather than turning to your nearest and dearest for funding, you could open up the opportunity to the public via crowdfunding. This form of finance is rapidly gaining popularity, with entrepreneurs using sites like Kickstarter, Indiegogo and Pozible to acquire both funds and a customer base before launching a product or service.
Another way to harness support from strangers is via peer-to-peer lending, which links potential investors (individuals or companies, not professional ‘angels’) with business opportunities.