Guest Post by Marsha Kelly
For an entrepreneur, finding ways to fund your business is a top priority both when starting your business and as your company continues to grow.
But when I, like many other entrepreneurs, was starting out, I was unable to reach my full potential due to limited funding.
So in order to succeed, I needed to find reliable sources of capital, both to launch and sustain. Here’s are some new funding options that I found helpful. With the loans I got, I was able to grow my business successfully, ultimately selling it for over a million dollars.
Six Ways To Finance Your Small Business
There is no “right” way to fund business as everyone’s situation is unique. To help you understand the options and find the best solution, I’ve put together a list of funding options that worked for me.
Using Your 401(K) For Startup Funding – With No Tax Penalty or Repayment
Many people skip this option, thinking taxes and fees can reduce the amount of money that can be used for funding their business. If you’re not 59 ½ years old or older, you will face taxes and large penalties for withdrawing money. However, through the Rollover for Business Startup (ROBS) program, you can pull $50,000 or more out of your retirement account to start, buy or expand a business without paying any penalties or taxes.
There is no “right” way to fund business as everyone’s situation is unique.Tweet
Through ROBS, you buy shares of your own company. To use this system, you have to set up a Type C corporation, since those can offer shares of stock.
Be sure to use experienced accountants and attorneys which specialize in this area of startup funding to ensure it is done both properly and legally. Due to the complexity of organizing ROBS, I highly recommend using an established firm to avoid problems. ROBS works best for funding of about $50,000 or more, due to start-up costs of around $5,000 and monthly charges.
It is important to note that ROBS is NOT a loan against your 401(k) account, so you do not repay anything, so there are no interest fees.
ROBS is not a line of credit, and it does not require you to provide any collateral.
You should be aware that this funding method uses your 401(k) assets, so a loss through ROBS can result in a loss to your 401(k) account and could have an impact on your financial situation.
There is some information that shows small business owners who use ROBS are more successful than those who don’t. An analysis shows that after four years, 81 percent of those using ROBS (Rollover for Business Startup) funding are still in business after four years, compared to the Small Business Association survival rate of 51 percent.
This is because firms using ROBS startup funding don’t drain cash from their daily business operations handicapping their working capital and growth opportunities.
Finance with Invoice Factoring to Bring in Cash Quickly
Invoice factoring offers a way to access money without waiting. Like most businesses, some customer invoices you have are unpaid – tieing up needed cash for operations. Through invoice factoring, these can be turned into funds easily. This works best for invoices due in 90 days or less.
I found this to be an especially beneficial source of capital because my customer’s credit ratings, which was higher than mine, was more considered more carefully than mine, which was low due to being a new company, for approval.
Several companies offer invoice factoring with credit lines up to $100K and have prices as low as 0.5 percent weekly. They also provide repayment periods of 12 or 24 weeks. Prequalification is simple, and your company will be financed in as short as one day with a completely online application process.
Often your business can get about 80 percent of the invoice value upfront, with the remaining 20 percent minus fees paid when the bill is paid. Through this system, another company collects the invoices. One downside with invoice factoring is that through fees, you will not receive the full amount of the invoices.
Invoice factoring is not the best method for funding larger projects, but it can be helpful for businesses looking to improve short-term cash flow. I used invoice financing to get the cash needed to fulfill the largest order I ever got from the QVC shopping channel. Without this source of cash, I would have missed this great opportunity that exploded my company growth and profit.
If your company does not bill customers, this option will not work for you, and you should consider other funding options. Learn more about the difference between invoice factoring and financing and get your FAQ answered.
Account Receivable Financing Using Order as Collateral
Account receivable loans and invoice factoring are confused by some people. Invoice factoring is essentially selling your unpaid invoices. Invoice financing allows you to put the invoices up as collateral. Since it is collateral, if you don’t repay the loan, the invoices may be used by the lender to satisfy the debt.
One of the biggest factors in determining how much you can get through the account receivable financing depends on the payment history of your customers. The better they pay, the easier it will be for you to get funding at reasonable terms.
Working Capital Loans Vital for Growth
Working capital loans are vital to help your business thrive. Every business has gaps in their cash flow, especially fast growth firms like mine, and perhaps yours.
These types of loans are used for a variety of purposes, from acquiring inventory, paying employees and other expenses. Unlike some limited financing that dictates what loan proceeds can buy, these are 100% flexible. So if your sales are slow and you need a way to meet obligations, using a working capital loan is a good option.
Through a working capital loan, you can receive funds fast.
Business Line of Credit Offer Access to Capital
If you see a continual need for capital, a business line of credit may be ideal. A business line of credit is similar to a credit card and allows for you to use the funds how you need to. This type of loan makes it easy to get funds quickly without filling out forms. A business line of credit can be helpful to have, whether it is needed immediately or not.
Online short-term lenders offer loans for small businesses and may be a viable alternative to some of the other funding methods for your business situation. Reviews for these lenders show that borrowers often get their funds quicker than through other sources, some within a few hours of submitting their application.
Unlike traditional banks, this new breed of lenders views your business holistically instead of overly focusing on your credit score and collateral to secure the loan. They utilize the power of your business data; credit card receipts, banking transactions, and accounting software, to determine your loan eligibility. I appreciate this more realistic, enlightened and fair approval process.
For those with bad credit, these short-term business loans are your best option. However, while those with poor credit may get approved, their interest rates may be higher than other borrowers with higher credit scores.
If you decide to use this finance option, you can get between $2,000 and $100,000 to help with your business funding needs.
Merchant Account Advances Help During Slow Times
Since most businesses use credit cards, using a merchant account advance may be something to consider. A merchant account advance provides a loan based on your average profit.
You repay the loan by having the lender keep a percentage of the credit card transactions. This method allows you to spread out the repayment over a period and sales.
Consider Your Options Before Selecting Your Funding
There are a variety of options you can use to fund your business. It is vital that you understand the pros and cons of these methods before using them. However, once you know your options and have weighed the costs and benefits, you will find that there are ways to fund your dream.
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 really work well in business today. You can learn from her experiences to build your business.