Whether you have a great new startup idea or a long-running business, you’ve probably come to one inevitable fork in the road: financing.
It’s the extra capital you need to take your company to the next level, be it for funding resources, creating a new marketing budget, or securing a deal with an overseas manufacturer. Entrepreneurs in Connecticut know full well the challenges faced as its highly-competitive markets cater to some of the wealthiest income brackets in the country.
Small business owners face particularly unique challenges when it comes to financing—and trust me, I know all about these. I’m a serial entrepreneur who’s been through the wringer having started one of my companies from scratch, growing it, and eventually selling for $1,000,000.
One key financing lesson I’ve learned is that there are many options for entrepreneurs to choose from, each with their own advantages and disadvantages.
So let’s go over some of these finance choices—ranging from 401k rollovers to invoice financing and beyond—to discuss which one is right for you.
Financing Strategies for Startups
Small business startups are already enduring enough challenges—getting new customers, establishing a good reputation, and the list goes on.
Thankfully, there are a number of great ways to fund your business during its earliest stages.
SBA Bank Loans: One of the simplest and common routes to take is a bank loan, specifically through the Small Business Administration (SBA). The government has vested interests in ensuring a vibrant economy and, thus, has allocated a certain number of funds to help out startups. Just remember, you’ll still need a great credit score and significant security (like your home) to qualify.
Grants: Aside from this, there are also grants. Every year, countless private and public organizations offer grants to help innovative or helpful new technologies and services. By visiting www.grants.gov, you can browse many thousands of potential funding sources to give your startup that extra boost.
Crowdfunding: A somewhat unconventional yet burgeoning new option is crowdfunding. Thanks to the internet and websites like Indiegogo and Kickstarter, you can now receive hundreds, thousands, or even millions of dollars through the generous donations of thousands of people from around the world. Even better, since 2016, the JOBS Act loosened regulations so small businesses can promote their stocks for financing on these crowdfunding sites.
Seed Financing: Seed financing, either through startup incubators or some venture capital firms, provide another option. While firms specializing in venture capital generally do not invest in startups, there are exceptions, such as with Accel Partners. Similarly, startup incubators and accelerators are organizations that facilitate the needs of small businesses and can provide financing.
Friends and Family Investments: Sometimes, though, you can avoid the “official” routes and consider investments from family or friends. It may seem unconventional but it’s a totally viable option that could mutually benefit you and the partner. Indeed, securing funding from someone you know personally can actually boost your odds of being invested in from “official” investors, since it indicates your credibility and trustworthiness.
ROBS / 401(k): There's also ROBS, an often overlooked treasure trove in the form of your 401(k) retirement account, which you might have thought was strictly for use after 65 – but think again. I used my 401k to fund my startup business. Here's how I did it.
ROBS—Rollover for Business Startups—allows you to transfer the money from your 401(k) and use it to finance your business’ startup. In order to do this, you must follow these steps:
Create a C Corporation: turn your business into a C Corporation (others, such as LLCs or S-Corps, do not qualify).
Estabalish a 401(k) Within the Business: the company must have the capacity in place for these retirement securities.
Roll It Over: shift your current 401(k) into the new startup.
Regard Your Startup as an Asset: the rolled over 401(k) funds can be invested into assets.
Investment Becomes Capital: the newly-invested money into the C Corporation is now available as capital for financing.
The ROBS financing option for small businesses is a great one to consider when you need that extra lump sum of cash.
Although like all investments this approach could ultimately fail if your business fails, there are some upsides compared to traditional investment options. Specifically, the 401(k) funds are before-tax and no implications exist towards your credit history.
Financing For Established Businesses
If your company is already established, there are a number of specific financing options that could work for you.
These include invoice factoring and invoice financing (also known as accounts receivable financing). Although there are many similarities between these and their overall functions, specific differences exist that make them uniquely suited in certain scenarios.
Invoice factoring basically allows you to sell outstanding invoices for cash. The invoices are essentially sold to a third-party entity, entering them into an exchange.
In general, you can enjoy roughly 80% of the advance immediately. Plus, you’ll no longer have to waste so much time hounding your clients for unfulfilled checks.
Invoice financing (also known as accounts receivable financing) works by selling your accounts receivable. In turn, those pending payments become cash that can be used for all types of business-related expenses.
Effectively, you are selling an asset, which is much different compared to purchasing a loan. Although some of the mechanics are similar, the key difference is that it doesn’t come with the baggage of “going into debt.”
Your customers and their reliable credit history essentially become an asset you can capitalize.
Companies like Fundbox, for example, offer invoice financing services . The process involves connecting with your business’ accounting software and then divvying up funds to you within your overall credit limit. Funds are generally transferred to you within 1 business day.
One of the key differences between invoice factoring and invoice financing is that in the latter, your company retains more control and privacy – something I know from personal experience. In contrast, the factoring route usually involves a more invasive third-party company that often contacts your clients about payments.
The internet has brought an unprecedented level of innovation and connectivity to the world. With this has come a broad new set of services, including within the realm of financing, referred to as Fintech.
Many reputable services online that offer reliable lines of credit to help fund your business needs. One of the great conveniences with these lines of credit is that they often come with exceptional terms such as to pay back loans within 6 or 12 months after drawing funds from your account. In other words, your full credit available amount remains in your account, but you are only required to pay it off after a period of time starting once the money is taken out.
Additionally, instead of paying interest on the credit, you only have to pay low monthly fees, ranging from 1% to 4%. Applications can be filled online and approvals can be done simply by connecting to your business’ accounting software, such as QuickBooks.
Aside from lines of credit, there is also working capital. As obvious a source of funding as this may seem, it is often overlooked amid the hectic day-to-day operations of a business. Working capital is based on a ratio of currents assets and current liabilities.
Within these variables exist the potential for short-term funding options that may not be immediately apparent yet could go a long way for sustaining your needs.
Financing is necessary for both startups and established businesses. The aforementioned options come with their own unique offerings that could be a perfect fit for your needs.
The 401(k) rollover plan is one of many startup funding options available to aspiring entrepreneurs. Alternatively, invoice financing or factoring can help find wealth within unpaid invoices. With lines of credit and working capital, you can discover even more nuanced business financing options.
As competitive as the business world can be, there are plenty of helpful financing solutions that can bolster your company when you need it most.
About the Author:
Marsha Kelly sold her first business for more than a million dollars. She has shared hard-won experiences as a successful serial entrepreneur on her Best4Businesses blog, where she also regularly posts business tips, ideas, and suggestions as well as product reviews for business readers. As a serial entrepreneur who has done “time” in corporate America, Marsha has learned what products and services work well in business today. You can learn from her experiences to build your business.