Listed below are 5 things start-up companies need to be aware of when seeking alternative financing:
1. Business Foundation
As a new business owner, did you make the decision to operate as a Sole Proprietor, or did you choose to incorporate your entity? If you did incorporate, great! More financial opportunities are available to you. As an incorporated entity, financial institutions and alternative funding sources are more apted to possibly providing financial assistance. As a LLC, INC, LP, CORP, and so on, you show the funder that you understand the full ramifications of being an incorporated entity as oppose to being a Sole Proprietorship. As a Sole Proprietor, you are a greater risk to an alternative funding source.
Depending on your business module, this will help to identify whether you are a fit or not for these funders. Presently, there are fewer alternative funders financing Sole Proprietors each day, due to the high risk factors of tax evasion, fraudulent transactions, and so on. Not to say that Sole Proprietors cannot get this type of financing, it just means that there is a limit to the number of funding sources available to assist you in your time of need.
2. Locating Alternative Financing
Start-up business owners most times know only their banks as their primary source to get a loan or line of credit. Their alternative source(s) most times tend to be family or friends. Who knows, this could be something that can make or break a family or friendship when hard times hit a start-up company. Who do you turn to when you have run out of options? Alternative funding sources are available throughout the United States, and all have their own specialized area of expertise. There are funding sources for almost all areas of business, and as alternative financial experts, they make the deals happen.
They have the knowledge and the money to help take your business to the next level. How do you find them, you might ask? Ask questions within your business community, banking sector, and so on. You can also seek out financial consultants but better yet, the kind of cash flow consultant who have direct access to these types of funding sources who can put you with the right source from the get go. Understanding how your business operates, where you are presently, who your clients are, what your plans are, and so on, makes it easier to determine how a cash flow consultant will be able to assist you.
3. Understanding how Alternative Financing can help your business
Yes! It is great to know where to find the money to help your business but do you really understand how it can help you? Did you know that if you opted for an alternative financing option, it could possibly have saved your start-up entity from being a part of that 80% who go out of business within the first (1st) year? Did you know that understanding alternative financing could mean the difference between being able to bid on a contract and possibly winning it? Did you know that understanding these options could mean the difference between keeping and losing your employees (a business most-valuable asset)? Did you know that utilizing these options could help to make you a more bankable entity in the eyes of the banks within a short period of time?
Understanding what this can do for your business is a must. Develop a plan of action as to what type of financial services you might need, when you might need it and learn all you can about those solutions. If you are in the real estate, construction, medical, transportation, security and so on, learn what the funding sources are looking for in a company like yours, in order for them to be able to better help you.
4. Risk Assessment from a Funder’s Perspective
Assessing risk from a funder’s perspective is simple. If the funder lends you money (say Hard Money), advance you funds in the form of Factoring, Purchase Order financing and others, who stands to loose the most? The funders, of course, but remember they know how to analyze their risk level, and so they will not go into a zone that is 100% risk to them. Someone has to be responsibly for the payment of that debt, however it is structured.
Since more cases of fraud are occurring daily, funding sources are also getting more sophisticated in being able to determine if a prospect is legit or not. Going back to (1) Business Structure, funders will look at your structure and the type of business you are involved in to determine if you are at a higher risk level than others. On the other hand, if you are seeking 100% financing in the commercial arena, you are barking up the wrong tree. Most commercial funders will not do 100% financing. It is just not happening especially now, whether on a small or large scale. Depending on the funder, and how your business/project is laid out, you might just get what you are asking for, if you know what you are doing!
5. Decision Making
This is the single most important element to actually obtaining financing. After learning all you can about a particular alternative financial product, you have to weigh the pros and cons of how it will affect your business.
Questions to ask yourself: what will this do for my business in the next few months, years? How will this help? What other alternatives do I have? What are the requirements? Will they be as stringent as the banks? What do I have to do to get started? How will I be treated and what does the process entails? How long will it take to get the funding? What will it cost? Do I get to talk with the funding source directly? And so on….
After figuring out what your business actually needs, you then need to make a decision. This decision will help shape your business one way or the other. Take a sheet of paper, divide it into two columns. On one side, list five (5) positive things that come to mind in seeking funding, then do the same on the other side, but this time list the five (5) negative things instead. Then measure for yourself what both columns bring to the table. Does column one (1) outweigh column two (2) or not? This will help you figure out what you need to do. A word of caution though, business owners who procrastinate in making a decision about the usage of alternative financing, result in unfavorable situations for themselves, and sometimes are not able to obtain funding due to mitigating factors beyond a funders’ capabilities.
It is my hope that as a new business owner, you will make informed decisions to enhance the building and sustainability of your business.
Karlene Sinclair-Robinson, dubbed The Queen of Business Financing is the author of The Small Business Owner’s Guide to Alternative Funding: What The Small Business Owner MUST Know To Get Through These Financial Times.
She is a seasoned entrepreneur, alternative financing expert, business consultant, and speaker based in Northern Virginia. With access to capital, Karlene focuses on alternative financing options for small to mid-size businesses that have been denied the opportunity to access capital through traditional institutions. She assists business owners and real estate investors nationwide access a variety of financial options, even those with less than stellar credit. She also provide coaching services to those startups and small business owners who are in need of the support to get them to the next level.
She decided to write this book based on the issues she came across when dealing with individual clients and witnessing their inability to access capital through traditional sources while being unaware of alternative options.
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