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Alternative Startup Financing
For Small Businesses

Startup Venture Capital is One Option

Business startup financing is difficult to obtain. Alternative methods of financing include bootstrapping, startup venture capital, small business startup grants and personal loans or credit. Which is best for your business?

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I've recently heard stories of businesses that have had their operating lines of credit slashed to a degree that continued operations are barely (or not) possible.

I've also heard stories of asset financing that fell through at the last moment because the lending organizations are not able to access the necessary funds, particularly based on the tightening financial requirements necessary in today's volatile markets.

In fairness to the lending institutions, the business failure rate is high, and growing higher, so their current ultra-conservative approach might be necessary for their own survival.

Startup Financing and Bootstrapping!

Bootstrapping in the context of this discussion is focused on financing a business startup or business continuation or growth through non-traditional methods.

Some say that bootstrapping is about starting a new business without startup financing or startup venture capital.

To new business owners that may mean borrowing from non-traditional lenders, applying for small business startup grants, strategically using small business credit cards, working several jobs to raise the necessary cash, or even trying to find additional partners or investors. It can also mean changing your small business plan to startup with less financial need.

For example, consider buying used furniture and leasing two computers, instead of buying new furniture and purchasing three computers. And improve cash flow: for example, by selling your goods or services with shorter terms for more immediate payment or by providing incentives to customers to pay invoices immediately or quickly; and to extend terms with your suppliers to pay them over a longer period of time; these tactics will help you preserve cash.

Traditional business financing includes banks, government financial programs, and commercial financial lending institutions. These organizations provide lending products, operating lines of credit and cash flow programs, equipment leasing and asset financing, and more. Additionally, startup venture capital funds are another, rather more traditional form of raising financing.

But, due to current global financial market conditions, it can be challenging to, first, qualify for access to this startup financing - lending criteria has tightened to the point where most traditional lending institutions want a sure thing and, second, to actually get the lending institutions to disperse the business start up loans, asset financing, or operating funds promised.

Some Non-Traditional Business Financing Methods
might include:

  • use of credit cards;
  • owner(s) income from a second (or even third) job;
  • second mortgages;
  • equity loans (secured by personal assets, such as a home);
  • customer loans or advances on future orders;
  • supplier loans;
  • develop a strategic partnership;
  • loans from family, friends, acquaintances, business associates.

Financing Your Business

For small business owners, obtaining financing to startup your business or to keep it operating (or to grow your business through acquisition, take-overs, and horizontal or vertical mergers) is usually a high stress experience.

You need to ensure that your business can support the money you want to borrow. You need to build a strong business case and provide your lenders with detailed information on your business, your strategy, your human resources, your target market and marketing.

Can You Qualify For A
Small Business Startup Grant?

One startup option might be to see if you can qualify for a small business startup grant: from your local association, or bank, or government.

Typically, grants (which are not the same as a loan because they are not repayable) are given for some specific niche type of business; for example, a business that employs disabled workers.

Financial lenders need to be able to assess your knowledge, your capability, and your opportunities for success.

Additionally you will need to put up personal guarantees for the money you are looking for; this means you need assets to back up your guarantees. Not all new business owners have the credit worthiness or credit rating to qualify with the lending institutions (or even to qualify for business startup grants).

If you are considering bootstrapping as a means of financing your business; it is a high stress experience.

You may now owe money to family, friends, customers, suppliers, business associates, and so on. If your business doesn't succeed then those people who helped you startup will lose all or part of their investments.

The hardest financing for many entrepreneurs, but the lowest risk, is to finance it yourself by selling some assets (for example, your car, your house or anything else of value) or by working a second job until the business is sustainable.

All small business startups and new business owners, as well as owners wanting to continue their operations or grow their business, need to ensure that they develop and manage their small business plan successfully.

Therefore, ensure that your plan is do-able and ensure that you understand your market, your competitors, your customers, your products and services.

Use that understanding to negotiate the best financial start possible.

Is Bootstrapping the Best Option?

Keep up-to-date in your industry; network with other small business owners inside, and outside, of your industry. Talk with your industry association and/or find a good business mentor or advisor to help you make the right business decisions and to improve your financial problem solving outcomes.

Bootstrapping is an alternative way of obtaining startup financing or acquiring business financing for ongoing operations or capital expenditure investments; make sure whatever method of financing you select that it's a best-fit for you and your business operations.

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Meeting Financing Challenges

Getting financing for starting up your new business is a challenge.

But just as challenging is ensuring that you have enough financing to operate your business.

Most businesses do not have a steady flow of cash incoming (or outgoing); it comes in 'fits and starts' no matter how much we try to plan for consistency in cash flow.

You need to ensure that you forecast your cash flow needs realistically and that you are on top of your accounts receivable; do not let your customers use you as their bank (by extending long payment terms), especially during the start up years of your business when every dollar is important to your success.

Make sure that you are clear in setting up new customer accounts: tell your customers what you need and expect in terms of payment (for example, cash on delivery (COD), 15 days from date of invoice, a deposit on order and balance on delivery, etc.).

However, also make sure that your invoice terms are competitive for your industry; check out what your competitors offer and make sure that your terms are competitive. For example, if you want payment in a shorter time frame than your competitor offer an incentive for that earlier payment: perhaps a discount of the next order, or a rebate, or a gift.

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Alternative Financing Strategies Include:

  • Merchant 'advances': from companies that lend money on credit card cash flow rather than collateral;

  • Accounts receivables or trade financing: from 'factoring' companies that buy and assume the ownership for the invoice from a customer;

  • Raise money through preferred shares (non voting) or common shares (voting) in your limited company;

  • Subordinate financing: typically a higher interest (because it is higher risk) loan based on cash-flow and receivables, rather than on assets.

For each of these alternatives, talk to your accountant and your banker: even if the banker isn't loaning you the money, they can provide valuable input and advice.