(Hugo90)
Financing a small business is rarely an easy task. Unless you have spotless personal credit, getting a corporate credit card will be difficult. Without a large savings account, bootstrapping is also problematic.
So what’s a creative-minded entrepreneur to do: give up? Of course not. Businesses throughout history have grappled with the financing problem, and the successful ones all found ways around it. More often than not, the very same strategies can be used to get over your personal financing hurdles.
“Cash Floats”
Despite being remembered as a towering business legend, Henry Ford did not begin as a wealthy man. Quite the contrary: as Ford Motor Company (F) explains on its corporate website, Henry came from humble roots and never forgot them. Despite deriving greater financial security from a job promotion at Edison Illuminating Company in 1893, he did not have the luxury of a large cash reserve with which to start Ford Motor (the epitome of a capital-intensive business.) The way Henry Ford managed to start, sustain and grow his business was by using so-called “cash floats.”
Ford knew he could never afford to pay for all the materials needed to build a car up-front. So instead, he negotiated deals with dealers obligating them to pay cash for his cars. Then, he convinced suppliers to let him pay for the materials 30 days after receiving them. In this way, Ford could get his parts right away, build his cars and sell them to dealers at a profit before any of his expenses came due.
Silent Partners
Another creative financing technique at your disposal is to seek out a silent partner. A silent partner is any investor who puts money into your business in exchange for future profits but does not have a voice in decision making. This could be a wealthy relative, a co-worker or anyone else you can persuade to invest. Be careful, though, not to accept silent partner investment from just anyone. The ideal scenario is taking a little from someone who has a lot, as such people are unlikely to freak out about the inevitable ups and downs of a new business venture.
Conversely, taking $50,000 from your retired Aunt Mildred could cause her to be extremely antsy about every little cash flow problem.
Consulting Work
(aWee)
In his essay How To Fund a Startup, Paul Graham of the venture firm Y Combinatorwrites that consulting work can help provide early seed money for new businesses:
“Another way to fund a startup is to get a job. The best sort of job is a consulting project in which you can build whatever software you wanted to sell as a startup. Then you can gradually transform yourself from a consulting company into a product company, and have your clients pay your development expenses.”
While Graham’s advice was admittedly tailored to technology startups, it is easy to envision the same model being applicable to other service businesses. Someone looking to start a small to medium-sized accounting firm, for instance, can take on freelance jobs in the early going and resolve to put most or all of that money toward growing his company. Different types of services businesses could conceivably do the same.
Hard Money Lenders
If your business is in a pinch and absolutely needs money by yesterday to capitalize on an opportunity, there are always hard money lenders. Payday lenders, for instance, make short-term loans at high interest rates.
But beware: there are very few circumstances when going to this type of lending establishment makes sense. The correct time to utilize a payday lender for business purposes is when you face a money-making opportunity that is certain, but fleeting, and which requires cash at once. If you can get the money quickly and use it for a deal that returns $50,000, what does it matter that you paid $5,000 in interest to get it? Then again, consider this your last resort for financing, to be approached only if you’ve exhausted all other options listed above.
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