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How to Fund Your Online Business |
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The second most common reason for failure of new businesses within one year after start up is not lack of sales, but lack of adequate funding to carry your business through those first few crucial months. Sadly, these disappointing statistics often belong to companies who have strong accounts receivable.
There may even be a good inventory on hand, but if you don't have reserves to pay for shipping the items that you sold until the checks clear the bank, or the merchant account transfer happens, you may be out of business almost before you began. Cash flow is particularly important during the early history of your online business.
Since most people don't have the benefits of a rich aunt just itching to help you get started in your dream business, what can you do to make sure you aren't one of the negative statistics instead of a success? Essentially, there are only two ways to get funding for a business: debt financing or equity financing. With debt financing, you're borrowing the money from somewhere and agreeing to pay it back. With equity financing, you give up part of the ownership in your business in exchange for money. More specifically, here are some options for funding which you may want to consider.
RELATIVES AND FRIENDS
This is still your best option. Relatives tend to be a lot more forgiving if the business doesn't succeed. On the other hand, a relative who doesn't approve of the way you're spending the money you borrowed can be extremely annoying. You should still treat the loan as you would any other loan. Draw up a contract or performance agreement and both parties should sign. Family and friends may also be willing to help with some non-cash contributions. Or, you may prefer to allow Aunt Clara buy shares in your business.
BANK LOANS
Unless you are on very good terms with your banker, it may be difficult to obtain a loan for a new business venture. Another alternative is to find a co-signer, or to put property or other assets up for security on the loan. Banks tend to require a great deal of paperwork as well. And, if the business goes under, you stand to lose a lot more than just business inventory.
CREDIT CARDS
Credit cards are a great tool for cash flow management. If they are used as a short term cash management tool and not for funding of major portions of your business inventory. Purchasing with a credit card means the monthly minimum balance must be paid whether there is enough revenue coming in or not. You'll feel a lot more at ease when there's no cash in the till if you know you have an untapped balance on a credit card saved for just such an occasion.
LEASING
If you can lease rather than buy those big ticket items, you'll be better off financially. You do have the monthly lease payment to cover, but you may also have part of the nest egg which you planned to use for start up costs to help with the monthly fees until the revenues start rolling in.
ANGEL FUNDING
This group will look at a business plan and approve or deny funding much more readily that a bank for instance. They are used to looking at ideas with potential and investing in those ideas with the expectation that their investment will pay off substantially in the future. Venture capitalists also invest in ideas, but usually they are interested only in loans with a minimum of $1 million and potential for a significant return on their investment.
PRIVATE FUNDING
These are investors who want more from their money than bank rates, so they turn to start-up funding or loans in small businesses. The business usually has to prepare a business plan and be feasible, These investors are often far more willing to take a chance on a loan than the bank
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