Money: it makes the economy go ‘round, and for your small business it could be the difference between success and failure. Whether it’s acquiring some extra capital or an official loan from the bank, financing your venture could seem like a daunting task.
Just having a great idea for an innovative new company may not always suffice—a well-financed business can ensure you have the necessary funds when it matters most.
There are some great tools and tips to make this process easier and get started right away.
My Business Background
Before diving into the best lending strategies, I’d like to tell you a bit about how I’ve personally used the extra capital to expand my business.
You’re reading the words of a serial entrepreneur—I’ve been at this game for many years and knew the benefits of financing in and out.
Yes: I took the rough route of building up my company from scratch, but I soon learned that something as simple as a small loan could quickly take me to the next level.
A little extra capital allowed me to outsource tasks to other talented people across the globe. Branding and advertising could be ramped up to match my vision. I could even burst into new, diverse markets that otherwise would have been outside my financial limits.
Sometimes, opportunities will present themselves that only exist for a short time—having a solidly financed business can allow you act on those before they disappear.
Financing With A 401(K)
Most people might be surprised to learn that they can withdraw money from their 401(K) retirement account to start their own business.
Contrary to the most assumptions that the money can only be used for when you’re old and retired, your accumulated funds can be used for entrepreneurial ventures. This is all thanks to a program called “Rollover for Business Startups,” or ROBS. The Wall Street Journal says that a ROBS can be a useful way to get an operation going.
Whether it’s the money deposited by your employer or some that you’ve set aside for yourself, it’s not uncommon for people’s 401(k)’s to accumulate large sums of money. You might have tens of thousands of dollars sitting in their right now—and thanks to ROBS, you may be eligible to withdraw those funds and put them into your small business.
Taking out thousands of dollars of cash from your retirement account might be the choice for you, though it will probably require some extra guidance from CPA’s and attorneys—seek help from the pros!
Here are some key steps you’ll have to take to finalize the ROBS process:
- Turn Your Business Into a Type C Corporation: your business needs to become a Type C corporation to qualify for the ROBS program. This is required because of specific IRS rules.
- Create a Retirement Plan for Your C Corporation: make sure your business has a retirement plan. These include anything from a 401(k) to profit sharing or even defined benefits.
- Rollover (Transfer) Monies To Your New Account: this is where the funds from your current retirement account are transferred to your new Type C corporation’s account.
- Purchase Stocks In Your Company Using Its Retirement Plan: at this point, you will purchase stock in your corporation using the funds in its new retirement plan.
- Access Your Cash: with all these steps complete, you lastly need to work with your ROBS provider to establish banking transactions.
Utilizing your 401(K) as a means to fund your small business is one of the most appealing methods available. Retirement funds can be used for all sorts of things once you’re retired—but imagine putting it to work to build your entrepreneurial dreams.
Working With Working Capital
When it comes to your everyday business operations, working capital might be the best choice for you. This practical financing strategy will help you fund normal business expenses/practices. If you find yourself in an off-season where sales are much lower than usual, working capital can help you stay afloat.
Essentially, this approach allows you to take out much smaller loans on a shorter-term basis. It truly lives up to its name “working capital” as it applies to much more practical and everyday needs.
Important to note, however, is that lenders can claim any equity that’s left over if bankruptcy is filed.
Business Line of Credit
A business line of credit is one of the most useful strategies for financing yourself over time. Specifically, it has its most significant perks for long-term expectations of capital needs.
This line of credit allows you to take out money consistently over time without having to refill bothersome paperwork and applications each time. Essentially, it is a preordained agreement that your company will be regularly taking out loans to fund itself. Inherent in these expectations is an understanding that there will be natural tendencies towards a variety of operations and expenses.
By establishing a business line of credit, you are essentially telling lenders that there will be numerous upcoming needs for further capital. This allows them to build a more fluid system where you can take out money without having to restart the loan process all over again.
When it comes to invoice factoring, you are utilizing a unique system to help acquire more capital. This process involves receiving loans that are tied to bills sent out to other business (B2B) or government institutions (B2G).
Essentially, if you’re owed money by another organization, invoice factoring, also called invoice financing, allows you to take out a loan off of any of these outstanding bill you’re owed. This is possible thanks to an outside, a third-party company you sign up with, such as my recommended review of Fundbox.
Invoice factoring is great for any issues your business faces with short-term cash flow.
Here are some general expectations to look out for:
- Average borrow limit of $10,000 every month
- Applications take between 2 and seven days to be processed
- Funds become available within 1 to 3 business days
To qualify for invoice factoring, you must send invoices to businesses or governmental clients, and such bills must be due within a 90 day period. Another significant limitation is any preexisting legal or tax discrepancies, which could raise red flags for some lenders.
Loan Kabbage – A Great Lender
There are many companies to choose from when seeking invoice factoring or other lending options. Kabbage is a great company to consider, primarily because of its fast fund-withdrawal times—sometimes within hours of applying.
Even with extenuating circumstances, like poor credit, Kabbage is very open to accepting new clients. This makes them a great candidate for new businesses in need of help. Read my review of Kabbage loans and see why I recommend them for small businesses.
Utilizing Account Receivable Financing
There are many similarities between invoice factoring and account receivable funding. The latter, however, is distinguished by a very important factor: any failure to repay loans will result in the lender collecting the outstanding bills to make up for financial shortcomings. At its core, this option is very valuable and provides added flexibility in the worst of times.
The Value of Merchant Account Advances
Not unlike invoice factoring, merchant account advances allow you to take out a loan based on your profits. Essentially, your business’ success is viewed as a signal of future earnings, and loans are granted. However, it works only if your company takes payments in the form of credit cards. This allows you to hover below your budget limits without even repaying loans.
Moving Forward With Financing
There are a variety of financing options for you to choose from. Each one addresses unique challenges and nuances depending on your business’ goals and experiences. By having a clear understanding of your short/long term ambitions, along with a sober assessment of your business’ current standing, you can use these financing strategies to stabilize your company moving forward.
About the Author:
Marsha Kelly sold her first business for more than a million dollars. She has shared hard-won experiences as a successful serial entrepreneur on her Best4Businesses blog, where she also regularly posts business tips, ideas, and suggestions as well as product reviews for business readers. As a serial entrepreneur who has done “time” in corporate America, Marsha has learned what products and services really work well in business today. You can learn from her experiences to build your business.