Low-risk ways to finance your start-up
Spearheading a start-up or small business can be many things, but ‘easy’ certainly isn’t one of them. As a matter of fact, it can be one of the most challenging and rewarding roads to take in life. Unfortunately, the challenges involved can’t be overcome with hard work alone – sometimes, what you need is an injection of funds.
Fortunately, there are many different ways to fund your start-up – or finance business growth – without too much risk.
Many start-ups make use of invoices, often requiring their customers to pay within a period of a few months. While these terms are reasonable, a small business may be unable to cope with waiting so long to see revenue – risking a cash flow crisis.
Invoice factoring is useful is because it allows you to sell these invoices to a third-party agency, which will pay you the price of the invoice (minus fees). This can be an absolute godsend because the agency will pay you as soon as they receive the invoice, meaning you receive your money months in advance. For a small business, this is often more than enough for them to get on their feet.
Even better is the fact that the invoice factoring agency will be the one taking care of collection when it’s time to pay.
Quite similar to factoring, invoice financing is has one crucial difference. The fees are lower, but you will have to be the one to collect the outstanding debts.
Some small businesses prefer this approach, because they want to have a strong relationship with their clients. Invoice factoring removes that interaction, which in turn could hurt businesses who rely on their customer relationships.
Revolving lines of credit
If your business doesn’t use invoices, perhaps a revolving line of credit is the thing for you. Acting as a kind of credit card, it applies to your entire business. Having a line of credit has saved many small businesses from floundering over the years. Just like a normal credit card, however, there are some prerequisites before you can be approved.
The most lenient revolving line is the secured line of business credit, which requires that you put business assets up for collateral – inventory or receivables are commonly used.
Unsecured business credit lines
A lot of start-up businesses can’t take advantage of an unsecured credit line, mostly because of its relatively high bar to entry. There’s a reason for this, however, and that’s because unlike the secured credit line, its unsecured equivalent will not ask you to put up any collateral. This puts the lender at a serious disadvantage, because they stand to lose quite a bit if you’re unable to pay.
This is the reason why it looks for a great credit record or any possible blemishes in your business credit history. If they happen to find anything at all, it’s very likely that you’ll be denied.
That said, there’s no harm in applying, even if you don’t feel you need it at the moment. There’s no real limit as to when you’ll be able to use the credit, so if you can get approval you can always take advantage of it down the line.
Finally, let’s talk about a high-risk financing method – a business loan. The major advantage of taking out a business loan is that it is relatively straightforward, and just about any business will be able to apply for one, no matter their credit history. Unfortunately, in return the lender will ask for some serious collateral. In fact, putting up real estate as collateral is common.
The risk is often too high for start-up businesses. If something goes wrong, and you aren’t able to pay, there’s a very strong chance that your business will be finished for good.