Financing Trends for Small Businesses

Posted by on October 12, 2009 · Leave a Comment 

By Johnny Duncan

It doesn’t matter how great the idea or how wonderful the business plan; the success of your business must also incorporate funding to sustain long term viability.

Most entrepreneurs look for funding from their own savings account, home equity loan, or stocks and bonds. Some people turn to their credit cards, which usually gets them in hot water even before they turn a profit with their business. The next source of funding is usually family and friends. This can work if everything is done in writing, but usually it’s not and the friend or family member who loaned the money wants to have a say in how business is conducted. If you don’t specify it in writing, you will always have that person looking over your shoulder until the money is repaid.

Finally, banks are an option if you can present a business plan covering all of the bases required. Business plan software can be found at Office Max or Staples and will walk you through what is required by the banks. Even if the business plan is flawless, the bank has to be convinced that the loan is worth the risk.

Some of the newest financing trends include “angels.” Angels are professional investors who seek start-up businesses to invest in. The Angel Capital Association (www.angelcapitalassociation.org) lists angel investor groups with links to websites for reviewing funding requirements. Angels are usually open to any good idea, but are typically looking for businesses with high growth potential, unique marketing advantage, and proof that the business will be led by experienced managers.

There are several non-bank lenders on the Internet that offer micro-loans for small businesses. The loans are typically in the $5,000 to $25,000 range. Here are some of the sites where you can shop around for the best deals: www.accion.com, www.prosper.com,

www.zopa.com, www.count-me-in.org, www.americaonefunding.com.

Business-plan competitions that are sponsored by universities and municipal economic development agencies are another new option for funding. These are not for everyone, but still worth a try if traditional financing doesn’t help. While your business plan will have to address concerns such as a five-year forecast of revenue and expenses, the contests can generate in excess of $75,000 for your business.

One of the oldest sources of funding making a comeback for new businesses is “factoring,” and it involves converting your account receivables into cash, linking the gap between invoice and payment dates. Here is how it works: You sell your account receivables for immediate cash, which is usually 70 – 80% of the invoice. You receive the remainder, less the factor’s fee of three to seven percent, when the full payment is received and cleared by the factor.

Some factoring firms allow you to choose which invoices to factor without setting any minimum volume requirements. This means that you have flexibility in financing your business. If you can swallow the fact that you will lose up to seven percent of your receivables, factoring might be the funding vehicle your business needs to grow.

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