A wise man once said that small businesses are the lifeblood of America. Yet, small businesses are one of the hardest enterprises to finance. Here are some creative ways you can go about financing your small business.
While relinquishing ownership of a half or more of a small business may seem crazy, it can be a great way to infuse capital into your idea. The amount does not have to be a huge sum in the millions- it can be much smaller. There is a large community of individuals that will lend out money such as a loan or in exchange for equity as either an active or silent partner. The key to securing this type of financing is professionalism and networking.
Finding individuals with large pockets can be difficult if you are fresh out of college or haven't done much networking. Once you have secured a meeting with an individual who may be a potential financer, be professional, treating their time as valuable. Arrive early enough that you can be calm in the meeting. Also, bring as much materials with you as possible- business plan, investment pitch or ideas, and product samples if needed. Being prepared will indicate your seriousness and indicate that you are a serious prospect for their investment.
For many individuals in American, their retirement account, either a 401K or IRA is one of their largest assets. Many people have taken advantage of employer provided 401Ks or started their own IRAs and have built up a significant saving in these accounts. These accounts may be used as a lending source or a direct investment from an IRA into a small business. The advantage is that you have a personal ready source to fund your small business.
The disadvantage of using a retirement account is that you are placing your retirement at risk. A 401k loan has an added disadvantage you must repay the loan in a set period of time with a specific amount of interest or you may be subject to a penalty. Additionally, you may miss the potential investment results that your retirement money could have been in, instead of your business.
However, if your small business is successful the gains you get in terms of financial security or a pay out when you sell could turn out to handily beat any gain of 5 or 6 percent you might have got in stocks or bonds.
Get a roommate or rent out your basement
A great way to unlock capital in an apartment or house is to “hack it” so that someone is paying part or all of your mortgage and you therefore have more cash flow freed up to invest in your business.
A roommate, while they may cramp your lifestyle, they will likely cut your utilities payments too. If you own a house, there is likely a way to rent out an extra room or turn the basement into a studio apartment to generate extra cash flow.
This does not have to be a permanent situation as all it takes is a few months to a year of extra cash flow and your business can get off the ground and start to support itself or be viable enough for more traditional financing.
The elephant in the room of creative financing is crowdfunding. Rather than discuss the sites you may have heard of, such as Kickstarter, you need to realize that crowdfunding is becoming more than just a couple of websites. Crowdfunding is becoming a movement, a generational concept, rather than just an option.
The best advantage of crowd funding is it is less risky than traditional debt. Sure, if you don't fulfill a million dollar Kickstarter then the backers may sue you, possibly even the government. However, in most situations the risk of loss is shared between you and the crowdsource funders. Thus, there are possible risks to you in crowdsourcing, but it may be a good way to get your business off the ground.