Every startup business incurs costs, and sometimes these costs make it almost impossible for a business to get off the ground. At the Nevada Small Business Development Center, we counsel business owners and help them realize their vision, sometimes by encouraging them to seek nontraditional financing.
Bootstrap financing
According to an article in “Entrepreneur,” bootstrap financing “is probably one of the best and most inexpensive routes an entrepreneur can explore when raising capital.” It helps owners explore opportunities within their own business model by managing finances more closely to reduce buy-in costs and free up funds.
As an example, if a startup requires expensive equipment, bootstrap financing might suggest leasing the equipment instead of buying it all at once. While businesses may incur another monthly expense by doing this, it could make the difference between securing that first customer and not starting up at all.
Having an idea for a tech startup is one thing. Finding funding for it is another matter. Investment firm GP Bullhound co-founder Manish Madhvani let us in to the office to see what grabs his attention during a day of pitches. Bloomberg
Factoring
Insufficient cash flow can be a challenging hurdle for businesses to overcome. Some startups and small businesses provide payment terms to their business-to-business clients, meaning they do not get paid immediately. While this can make a business’s product offering more desirable because of the flexibility, it also makes it more difficult for businesses without a large cash flow to pay monthly expenses and continue operations.
One option for business owners experiencing this problem is called factoring. If you need to be paid for products and services immediately, factoring companies will finance a business’s accounts receivables – and advance cash equivalent to 70 to 90 percent of the receivables – and then charge a monthly factoring fee ranging from one to six percent. There may be additional fees depending on how long it takes the factoring company to collect the receivables.
Factoring is great for small businesses that serve large companies with good credit because factoring companies decide whether to give money based on the credit of the company that owes the business its payments. Another strategy comparable to factoring is receivables financing: Instead of buying your accounts receivable, an institution lends you money against collateral, much like a traditional bank loan.
Royalty financing
With royalty financing, a company sells a percentage of its future revenue in exchange for the principal. The financing company will collect the royalty payments until the principal and interest are paid back. Obtaining royalty financing is more difficult for startups because most lenders require existing sales or recurring revenues.
Crowdfunding
Some startups have found funding success through crowdfunding platforms such as Indiegogo and Kickstarter. These platforms allow users to pledge money to a company in exchange for perks, rewards, and/or gifts that vary by the amount donated.
Private-sector financing is not the only route to funding. In addition to the options laid out above, local, state and federal governments award grants to businesses that meet eligibility guidelines. To learn more about your business’s financing options, contact the Nevada SBDC via its website, www.nsbdc.org, or by calling 775-784-1717.
Alex Soeth is an MBA student in the University of Nevada, Reno College of Business and serves as a business development advisor in the Nevada Small Business Development Center. Read Alex’s blog about small business marketing and growth at AlexSoeth.com
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