Alternative Financing Options

Lender-Financing Alternatives
Many entrepreneurs bootstrap, meaning that a large part of business funding comes from their personal savings, home-equity loans, or credit cards. But it needs to be done carefully. If you rack up a huge debt and damage your credit rating, it'll be hard to get further funding. Another option is to raise money from relatives, colleagues and other people you know well. In addition some customers may be willing to help fund your product development—if you customize it for them. As for suppliers, you may be able to convince one to hold inventory for you, as long as you guarantee them you'll pay for the material by a certain date. They may also be willing to increase your credit limit or extend your credit terms. When you’re raising money for your business, it pays to be creative. Following are some additional alternatives for financing your business.

Grants
We’ve all seen the headlines: ‘Millions in free government money for your business.’ Sound too good to be true? It is. The truth is that federal and state governments do not generally provide grants for starting and expanding small businesses. Grant programs typically support non-profit organizations that provide small businesses with management, technical, or financial guidance (such as the SBDCs), intermediary lending institutions, and state and local governments.

However, if you have a technology business, you might be able to apply for a Small Business Innovation Research grant (SBIR). That’s a federally funded program mandating that certain agencies set aside part of their budgets to fund fledgling high-tech companies with interesting inventions they want to commercialize.

Accounts Receivable Financing/Factoring
Factoring is the selling of a company’s accounts receivables, at a discount, to a factoring agency, which then assumes the credit risk and receives payment as the debtors settle their accounts. Factoring can provide a quick turnaround and convenient funding to growing companies who need capital to expand their business. Factoring is not a loan. There is no debt repayment, and long-term agreements are not necessary. For their services, factoring agents are paid a fee, based on a percentage of the accounts receivable.

Seller Financing
When contemplating buying or selling a business, an important option to consider is seller financing. There are many ways to structure the seller-financed sale that make sense for both the buyer and seller. The simplest way to provide seller financing is to have the buyer make a down payment, with the seller carrying back a note or mortgage for the rest of the purchase price. The business itself, and/or the significant business assets, provide the primary collateral for the note. A lien on the property is filed, so that if the buyer defaults on the note, the seller is first in line to step back in and take over the business.

Aside from its simplicity, this type of deal can be very flexible—adjustments can be made to the payment schedule, interest rate, loan period, or any other terms to reflect both the buyer’s and the seller’s financial situations.

Venture Capital
Financing through a venture capitalist is different from borrowing from a lender because, instead of earning interest, they take an equity stake (part ownership) in the business, and it might be substantial. The advantage of equity financing is that this infusion of capital does not have to be repaid like a loan. The venture capitalist earns a profit through dividends paid to shareholders of the company and through appreciation in the value of the stock of the company.

As a condition of investing funds in a business, venture capitalists often have the right to review management decisions and, in some cases appoint their own managers to oversee certain aspects of the business. While the entrepreneur typically retains day-to-day management control of the company, the venture capitalist has some control over the strategic direction of the business. Thus, highly independent entrepreneurs must think carefully before accepting venture capital. Not only will venture capitalists be entitled to a significant portion of the profits of the company, but they also take away much of the autonomy of the entrepreneur.