Startup funding – it’s kind of a big deal.
Most entrepreneurs know that it takes more than blood, sweat and tears to launch a business – cash (or lack thereof) is a major factor that can make or break your chances of creating a viable business. Even the smallest businesses require some capital to get started and, aside from the independently wealthy, almost all entrepreneurs will need to secure capital to fund their big idea.
If you find yourself stressing about cash flow, know that you’re not alone. The number one reason most startups fail? Inadequate cash reserves. A whopping 82% of businesses fail due to cash flow problems. It’s no wonder why 50% of founders opted not to pay themselves a wage one or more times in the past year.
Fear not founders – there are other ways to fund your business. Here are seven ways to get the capital you need to reach your short term and long term business goals.
Working Capital Actions
Working capital refers to the cash used in a business’s day-to-day trading operations. There are plenty of ways to actively improve the working capital of your business. A few examples:
- Invoicing: getting your customers to pay on time should be a top priority for business owners. We recommend adopting cloud technology like InvoiceSherpas to help you automate your accounts receivable and get paid on time.
- Deferring Income: not a favorite activity among founders, but sometimes an inevitable reality for bootstrappers.
- Stringing Out Accounts Payable: you have to be careful but sometimes it is necessary to string out your payables for a few extra days, you do start to risk relationships after about 15 extra days but that could be enough to help with one payroll cycle.
- Deferring Payroll: we never recommend going this route, but if you have key employees who are willing to defer payment for some sort of option or future bonus, this could be an option for you.
Personal Funding Sites
Our team also tested popular personal funding sites like Lending Club, Prosper, Ondeck. While they all had easy and painless application processes, we don’t recommend those facing a funding time crunch to go this route. The process took two weeks total from the time of application to funding. These sites also charge all origination fees upfront and Lending Club and Prosper require founders to take out personal lines rather than business lines (where OnDeck comes into play).
Family and Friends
Mixing personal and business is a controversial topic, making this option lower on the funding totem pole. If you do choose to go this route, make sure to get your agreement in writing. The biggest mistake we see founders make when pursuing a friends and family loan (or equity investment) is forgoing this critical step. Get your terms in writing and stick to them.
Alternative Lending Sources
We are always on the lookout for new and viable funding opportunities for our customers and recently tested Kabbage to see how the economics work. Our experience? The application was easy and it took a total of three days to get funded. We applied on a Saturday and got funded that Tuesday. While the interest was fairly heavy over the term of the deal, they are much lower upfront then Lending Club, Prosper, and OnDeck. You can’t beat the turnaround in a crunch. Our pro tip is that if you need 1 or 2 months of cash definitely apply for the 12 month loan instead of the 6 month loan, less interest rate in the first two months and no prepayment penalties.
Even if you don’t anticipate needing to fall back on this funding option, it’s a good idea to max out the availability on your home equity line ahead of time. Typically, a bank will loan a certain percentage of your home’s value. We recommend all founders take out home equity loans at the 80% of home value. Even if you don’t use it, it’s a great emergency cash flow vehicle. You can expect this process to take anywhere between 45 and 60 days.
401(k) Over IRA
If you are considering which type of retirement plan to put in place for your business, it might be good to pick a 401(k) which allows for loans. Unfortunately, you can’t borrow against a Simple IRA. Since withdrawing the money is so punitive (thanks IRS), 401(k)s can be designed to allow you up to $50k of borrowing capacity for your business.
Bank Line of Credits
Can usually borrow either 75% of your account receivable base that are current or 50% of your inventory if you’re an inventory business. Be careful about what covenants you agree to – minimal reporting requirements, especially if you’re personally guaranteeing it. Get rid of the audit requirement, review requirement, anything that requires a CPA approvement try to negotiate it out of the deal.
Because the U.S. government has a vested interest in the success of small businesses, the Small Business Administration offers many loan options. If you haven’t yet, go look through your local bank’s SBA products. It’s definitely a longer cycle for receiving funding and there are typically upfront fees to consider. But this can be a great funding source, especially for those just getting started.
For reasons both good and bad – things get tight sometimes when you’re running a business. Welcome to entrepreneurship. If you need help navigating your startup’s finances, know that we’re here to help. Contact our team of financial experts at any time.