Whatever business your company might technically be in, it’s important that you never forget that you’re really in the cash flow management business.
All the great things your company can do for your clients, your employees, and you, won’t matter if you run out of funding and can’t keep the doors open and lights on. It’s unfair, but the truth is, the time when your company most needs a funding injection is when it’s most difficult.
But don’t feel bad. Most young companies need to get creative and resourceful during their first years. And fortunately, there are business funding sources that are used to working with companies that are still trying to get established. Here’s a guide to a few.
Angel Investors
Angel financing represents money acquired from private individuals to assist small companies operate and grow. According to SmallBizTrends.com, the average company that attracts angel investment secures around $300,000.
Advantages of Angel Investment
- Patience. While all situations differ, angel investors tend to be less demanding than venture capitalists, who invest greater sums of money and expect higher and faster paybacks.
- Experience. Angel investors tend to put their money in industries they have worked in and understand, which puts them in a position to advise you in terms of strategy and long-term planning.
Disadvantages of Angel Investments
- Loss of equity. Most angels want equity in your company in exchange for the funding, which dilutes your ownership.
- Loss of some control. Some angels, due to their business experience, may try to exert control of your company beyond the worth or scope of the investment.
- Transparency. Venture capitalists and other firms that invest larger sums of money fall under jurisdiction of the SEC and other governing bodies, while smaller, angel investors typically don’t. That means you have to do your own due diligence and research on a would-be investor.
For more information, see MP Star Financial’s post, Angel Investing: Making it work for your company.
An SBA Microloan
Established in the early 1990s, the U.S. Small Business Administration’s Microloan program provides loans up to $50,000 to help small businesses. The average SBA Microloan is about $13,000.
The SBA allocates funding to nonprofit community organizations with experience in lending. These groups coordinate the Microloan program for eligible companies. Generally, borrowers are required to pledge some sort of collateral and you, the business owner, might also be asked to personally guarantee the repayment. Microloans can be used for working capital, supplies, inventory, and equipment and machinery.
Advantages of SBA Microloans
- Easier approval. Relative to conventional loans, SBA Microloans are easier to secure by business owners with marginal credit histories or who have been in business only a short time.
- Favorable terms. Although designed as short-term loans, some SBA Microloans allow for payoff in as much as six years.
- Free business advice. Many of the organizations that administer the SBA Microloans also provide help with cash flow management, basic accounting and bookkeeping, tax planning, and other basic small business functions at no additional charge.
Disadvantages of SBA Microloans
- Limited funding. There are exceptions, but most SBA Microloans are capped at $15,000.
- You’ll pay interest. Rates vary with market conditions, but have run as high as 13% annually in recent years.
- Certain restrictions apply. SBA Microloans can’t be used to pay off existing debts or to purchase real estate. (The SBA’s CDC/504 Loan Program can be used for real estate purposes, but qualification tends to be more difficult.)
To find a Microloan-approved intermediary, contact your area’s SBA District Office.
Invoice Factoring
Invoice factoring – where your company’s outstanding receivables are sold to a third-party in exchange for immediate cash – is popular with companies in every stage of development, but can be especially helpful to early-stage businesses.
Advantages of Invoice Factoring
- Speed. Invoice factoring is designed to work fast. Initial set up takes only a few business days. After an arrangement is up and running, your company can be paid on its submitted invoices in as quickly as one day.
- No additional debt. A factoring program doesn’t add more debt to your balance sheet. You’re not borrowing money – you’re just getting your money faster.
- Easy administration. Factoring takes the burden of collecting receivable and chasing late payments off you, and frees up your time and attention for other responsibilities.
Disadvantages of Invoice Factoring
- Your customer’s credit matters. While most applications for factoring are approved, invoices to your clients with questionable payment histories might have a harder time qualifying.
- Funds availability is tied to revenue. As your business grows, your access to factored funds will increase. But the opposite is also true – if business slows and you factor fewer or smaller invoices, access to funding might not be as large as it was previously.
For more information, or to apply online for invoice factoring, visit MP Star Financial.
Ready to learn more about factoring? Let MP Star Financial explain how factoring can help you get a better handle on your company’s cash flow management. Call for more information. (800) 833-3765, extension 150.