Starting and planning a business can be fun as well as a daunting experience, especially when it comes to being able to pay for all the equipment, inventory and payroll that goes along with it. How am I going to pay for all this, you may ask. How much will a bank loan me, or who is likely to be an investor in my company? I offer some solutions to these questions which further discusses these options mentioned in my August 23, 2016 essay on Funding Options.
For a start-up business it will be difficult to get an investor interested in it unless you have a hot, trending business and the personal skills and background that goes along with your ability to run the business. An investor focuses on your product and proven market demand for it indicated by sales growth and the cash flows that can be generated. Growth from year to year of say, 20% to 50% would pique his interest. He wants to be able to get a return on his investment for a period of years and then he may sell out in 5 to 7 years. He will determine your commitment to the business by asking how much of your own money is invested.
If you get an offer from an investor, he will most likely want preferred stock in the business. Preferred stock is stock in the business but with some differences. It has a maturity date and there is interest or dividends paid on the amount of the issue which is paid semi-annually. Here the investor is getting interest paid on the use of his money, and the maturity date indicates that the principal amount is repaid at the maturity date. The investor also has a higher claim on the business because of his position as a “preferred” stockholder.
Bonds are another instrument to consider. However, they are used to fund projects. If you are considering purchasing a building, for example, you could get a bond from your municipality issued for this purpose which will have a benefit of being tax-free to the investor and a lower tax rate for you to pay.
Bank loans are difficult for a start-up to obtain, but if you are in business for a few years and have growing sales and good cash flow, then a bank would consider you. Of course, there are the issues of collateral, character, capacity and economic conditions which will be considered. You can apply for a small business loan guaranteed by The Small Business Administration at banks in their program. The SBA loans feature interest rates that are below market.
Equipment can be purchased with an equipment loan and the equipment will be collateral for the loan. The beauty of this kind of loan is that the manufacturer may work with you on the amount of interest to be paid.
Of course, there is the Crowdfunding route you can take. Prepare a presentation of your product or project and the amount of money to be raised. Different crowdfunding platforms have different requirements and features for hitting your target amount. Read their requirements carefully and make sure the particular platform is right for you.
The above are considerations that must not be weighed lightly.