Crisis Survival Kit: 5 Ways To Fund Your Business - InformationWeek

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4/2/2009
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Crisis Survival Kit: 5 Ways To Fund Your Business

Need a cash infusion? You can forget about banks or VCs? Those traditional funding sources are strapped or stingy or both. If your businesses needs a significant investment to tap a new market, lock down the one you have, or upgrade equipment, you'll need to get creative.

Need a cash infusion? You can forget about banks or VCs? Those traditional funding sources are strapped or stingy or both. If your businesses needs a significant investment to tap a new market, lock down the one you have, or upgrade equipment, you'll need to get creative.Despite all the touting of the small business assistance in the federal stimulus package, the only thing increasing in the small and midsize business loan market is the delinquency rate. According to PayNet it was up again in February reaching a new high point. Accounts delinquent by 30 days or less increased to 4.45% and those by 90 days or less to 1.23%. A year ago, the rates stood at 3.48% and 1.04%, respectively.

According to Thomson Reuters and the National Venture Capital Association, there were no venture-backed IPOs in the first quarter of 2009. That's no as in none. And guess what? There weren't any in Q4 2008 either. The venture capital game isn't looking so lucrative anymore and the so-called angel investing game has lost its luster as well.

So with the "official" funding channels looking like long shots, were do business owners turn when they need funding? Chris E. Talis, senior partner of Hedgerow Mergers & Acquisitions, a Teaneck, N.J.-based merger, acquisition, and business consulting firm that focuses on the mid market, suggests these 5 ways business owners can find funding:

  1. Friends and Family. Many times the simplest way to raise capital is to go to friends and family and ask them for help. It may be a short-term loan; it may be to make an equity investment in your business. If you would like their dollars in the form of equity but would not like them to have any sort of voting power perhaps you can create a second level of stock (preferred stock for example) which would give them preference should the company need to liquidate but no voting rights.
  2. Existing Equity Holders. If your business is owned by multiple stockholders or partners you may be able to raise capital by going back to the original stockholders and requesting an equity raise. You may also create stockholder's loans whereby the company would owe each individual stockholder principal payments plus interest (it is important to keep it arms length especially for IRS purposes).
  3. Non-Traditional Sources Of Financing
    • Factoring. You may be able to find lenders who will advance funds based on specific invoices. These lenders will try to understand your business and then figure out a way to give you upfront cash on a newly generated invoice. They will generally advance you about 75 percent to 80 percent of the invoice amount and charge you anywhere from 1.5 percent to 3.0 percent per month in fees until it is collected. It generally has to be paid within 90 days.
    • Asset based lending. Some banks will lend you monies based on the company's assets. Whether it is equipment, real estate, inventory, accounts receivable or vehicles, banks will lend using the company assets as collateral. The advance rates will vary usually based on liquidity of the assets (accounts receivable inventory being more liquid and therefore would have a greater advance rate), and the cost to this type of financing can be costly as well as the reporting requirements being somewhat cumbersome.

  4. Using Personal Assets as Collateral. Many times entrepreneurs in need of immediate capital will borrow from their home's equity until traditional financing sources become available again. This can be a precarious choice in that you are risking the home to benefit your business but many times it is the only choice.
  5. Credit Cards. Credit cards are very costly, but in reality are unsecured loans and should be used only for short-term credit purposes.

Don't Miss: Financial Crisis Survival Kit

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