What are some of the popular types of short-term funding available to small businesses? How can you fund your business? You’ve got questions; we’ve got answers!
Bootstrapping is a funny word for a smart financial concept. The term comes from the phrase “pulling oneself up by one’s bootstraps.” An individual is said to be bootstrapping when he attempts to found and build a company from personal finances or from the operating revenues of the new company. According to Investopedia, more than 80% of new startup operations receive their funding from the founder’s personal finances.
So where exactly does the bootstrapper get startup funds? A bootstrapper may pull from a savings account, use zero interest credit cards, or leverage personal assets like selling a house or car and cashing in on a 401(k). With bootstrapping, the business is your own—no answering to investors like venture capitalists.
What are the benefits and drawbacks of bootstrapping?
Business owners who utilize bootstrap funding don’t have to worry about diluting ownership between investors. They don’t need to issue equity, and they can focus debt on personal sources. The downside? Unnecessary financial risk is all on the entrepreneur. And bootstrapping may not provide enough investment for the company to become successful at a reasonable rate.
What other companies have used bootstrapping?
If you decide to bootstrap, however, you’ll be in good company. Dell Computers, FaceBook, Apple, The Clorox Company, and The Coca-Cola Company each catapulted to greatness from humble beginnings as a bootstrapped enterprise. To learn more about bootstrapping, Fast Company offers 10 tips for bootstrapping your startup.
2. Friends and family
Of course, you can always tap into friends and family. With business plan in hand, pitch your idea to those closest to you, explaining what you’re selling, what you plan to charge, and how they’ll make money by backing your business.
What are the benefits and drawbacks of tapping into this method?
Be upfront about the risks and put the rules behind the investment in writing. Whether you’re asking for a loan, an investment, or even a gift, remember that each one comes with strings attached. In the case of loans and investments, you will have to pay the money back: you cannot file bankruptcy if the business fails.
Entrepreneur.com offers tips and tactics in Five Tips for Asking Friends and Family for Funding.
3. Loan or Line of Credit
You can also apply for a loan or line of credit. What’s the difference? A loan is a specific amount disbursed to you at once in a lump sum. It has a fixed or variable interest rate, and a fixed repayment term. On the other hand, a line of credit functions much like a credit card. You’re given a maximum amount that you can use over a period of time, and you can borrow against that amount as you need money.
What are the benefits and drawbacks?
Once you’re approved for a line of credit, you can tap into it at any time to access the amount your business needs. You can also use a line of credit as an alternate overdraft protection option on a checking account. Keep in mind, though, that excessive borrowing against a line of credit could get you into financial trouble as surely as continuing to rack up credit card debt.
Want to know more about the benefits and drawbacks of traditional bank loans? We just wrote an article to compare and contrast traditional bank loans and invoice factoring. Read the full article here.
4. Invoice Factoring
Invoice factoring can be a small business owner’s best friend. It’s been around for over 4,000 years, dating back to the time of King Hammurabi of Mesopotamia. In the 1900s, the most popular industries for invoice factoring were the garment and textile industries. Today, the transportation industry, staffing agencies, government contractors, and small businesses are taking full advantage of invoice factoring. The reason? It helps relieve the stress of cash flow and slow-paying clients without adding debt.
How does invoice factoring work?
Here’s how: you sell your invoices at a small discount to a factoring company like Triumph Business Capital and get immediate cash for your business. Since 2004, Triumph Business Capital has provided factoring services for 7,000 small to mid-sized businesses throughout the U.S.—so you can be sure you’re working with a reputable company that has your best interests in mind.
Are there any drawbacks?
Invoice factoring can have higher fees than traditional financing, with fees based on sales volume and factoring agreement. But it’s a small price to pay for welcome relief and cash in hand. Learn more about the Common Risks Involved with Invoice Factoring.
What are the best options for short-term business funding?
Triumph Business Capital offers more than just invoice factoring. If your business has grown to the next level and you’re looking for a larger loan to pay for new equipment or provide additional working capital, Triumph offers smart Asset Based Lending and Equipment Financing options as well as a discount fuel card program.