It is very rare to find a business that can be started with no money. However, it is a myth that you need to find a high level of investment to begin a business.
In some cases, it is possible to bootstrap your business and start with very little funds, then continue to invest any profits into the business as it grows and develops.
But what if you need to quickly find some cash to invest in your business and you don’t want to give away shares or incur large charges in order to do so?
Here are four ways to help you fund your business.
1. Customer funding
This may seem like an unusual approach to begin with, but it is becoming increasingly popular to use a business model where your customers fund your business.
Customer funded businesses are not a simple case of asking your current customers to loan you some money. Instead, it’s a way of designing your business so people will pay you in advance for something, allowing you to then have the funds to create what you customers have paid you for.
There is a chance that you have funded a business that uses this model without even realizing it. Airbnb is a famous example of a customer funded business, but this is fast becoming an increasingly popular business model -one that can be identified by those offering a subscription service or online training to name two common examples.
John Mullins’ book “The Customer Funded Business” is a great introduction to this subject. He explains how one of the advantages of the customer funded route is that you start your business journey by finding paying customers, “a much more hospitable and agreeable source” than Venture Capitalists.
By designing a service or product that is so desirable your customers are willing to pay you in advance for it, you remove the need to construct a highly detailed business plan that is typically required to obtain funding. John goes on to explain that your business success will often arrive “in the shape of Plan B or Plan Z, not the Plan A that has been so lovingly articulated in the business plan”.
This means that if you have a product or service that can fit into this funding model, customer funding is a great way to test the market while also raising funds for your business.
2. Line of Credit
While some businesses can be funded slowly and allowed to grow over time, there are those that require a large pool of money to get them off the ground.
This could be a restaurant or hairdresser, for example, where you will need to invest in premises and a certain level of equipment before you can begin to trade.
Sometimes the problem with a traditional loan is that you are not 100% sure of the amount of funds needed. The repayments are likely to begin immediately, and interest is charged on the full loan amount.
An alternative to this is a line of credit, with the most common being a home equity line of credit (HELOC).
A line of credit is a pre-agreed pool of money that you can borrow from. A HELOC uses your home as collateral.
The advantage is that you can get hold of the money as and when you need it, so the loan should never be greater than your need. With HELOC’s the banks will often give you a low interest rate as they see lines of credit as being low risk. Not many people will want to risk losing their home should they find themselves unable to make the repayments.
3. Credit card
A credit card is a quick and easy way to obtain a cash advance which you can use in your business.
Cash advances will vary between credit card providers and you will find that your personal and business credit history will also affect what they are prepared to offer. For these reasons we recommend taking the time to shop around to see what deals are available to you.
It is worth keeping in mind the interest attached to your chosen credit card as well as the repayment terms. Some credit card providers may give you an interest free period, so in an ideal situation you would aim to pay off any credit before this ends. Most will calculate your interest rate based upon your credit history, so keep an eye out for what rate you are being charged as it may be different than the headline or introductory rate on any of their marketing materials.
Falling behind or omitting to pay your credit card bill can make it an expensive way to obtain credit, but a good deal and sticking to the terms can make it a very affordable and quick way to invest smaller sums of money into your business.
It may be worth noting that if you have never had any loans or credit previously, you may find it harder to obtain a credit card or be offered the better interest rates. This is because banks look at your credit history before making their decisions, and having no credit history can make you an unknown entity.
Having no credit history can be restrictive but it is something that you can easily create. We recommend starting by applying for a store card, such as a department store. Use this every month at the end of the month, pay off the balance in full. This will demonstrate to the banks that you have had credit and have paid it off within the terms, helping you to build a good credit rating.
If you are looking at a very healthy profit and loss but have an empty bank account, it could mean that your money is being tied up in the credit terms that you are offering your customers.
Slow paying customers or a surge of new work before old projects have been settled can put a real strain on a businesses cash flow.
If this is the case for your business, then it may be worth considering factoring as a method of generating additional funds.
With factoring, you sell your outstanding sales to a third party – often a bank – at a discounted rate. The charges attached to factoring will vary between banks, but it means you are able to get the money into your bank account far faster than waiting for your customer to pay. This is especially ideal if you work with larger corporations who can take 60-90 days to settle an invoice.
The downside of factoring is the charges, as it may result in you losing around 10% of each sale. But, if your business can cope with this effective discount, it does mean you will have a cash injection to invest back into your business. Your customers will then pay the full amount within the agreed payment terms put to the factoring company instead.
Factoring is often associated with larger businesses, but options like Fundbox has opened factoring up to smaller businesses who may not have a large amount of unpaid sales.
Fundbox links to your accounting software. After reviewing your outstanding sales invoices, Fundbox can provide you with a cash advance within the next working day or two. Over the following 12 to 24 weeks, you make a weekly repayment to Fundbox to clear the drawn down amount. After each repayment, the amount (less the fees) becomes available for you to borrow again.
These are four simple ways to fund your start up or find additional finance for your business if you are looking to scale. Please contact us if you would like tailored funding advice for your business or help with cash flow.