Business Loans

Since the dawn of self-owned businesses, investors have been a necessary resource for helping the business grow, or simply keeping the doors open in hard economic times.  Most have reasonable expectations for a return on their investment.  However, others can be wolves in sheep clothing.  You should know the various types of benefactors and learn how angel investors can make or break your small business.

First, if you do not know what an angel investor is, he/she is usually willing to get in on the ground floor of your business and lend you the money needed to keep up with the competition and become successful.  Although most understand the risk of potentially losing their money, Angels have the hope that their faith in you is well-founded, and they too will make money in the end.

 
However, every angel has his/her own reasons for helping you in business. So, it is important for you to be able to identify your angel, in order to benefit from their strengths or back away from their weaknesses.  For example:

• Tech Anelg-if you are providing a product or service involving new technology, you are liable to attract the tech angel.  He/she may not necessarily be a financial whiz, but this individual is looking for a way to get in on the ground floor of promising new technology.  Like the other angels, making money is surely of interest, but promoting new innovations is a passion.
• Silent Angel-the angel with this personality does not really care to see how you conduct business from day to day, or offer any helpful advice.  He/she simply wants to make a sound investment and hope to make a significant amount of money in the end.  For example, individuals who bought stock in Microsoft when it was just a fledgling company are well off today, because they saw promise in the new business and had hope to get an adequate return on their investment.
• Lender Angel- He/she likes to lend money to promising entrepreneurs.  Looking for deals, it is common to encourage other investors to toss their two cents into the business as well.  Enthusiastic, he/she is good at spreading the word, whenever you need some cash to expand the business or keep you afloat until customers pay their bills.
• Grandfather Angel-The patriarchal angel is much like the lender angel in the aspect of getting other angels involved in your business.  However, he/she has been investing in people like you for a long time.  Successful and experienced, a grandfather angel has a lot of influence in convincing other investors to take a chance on you, or to walk away.
• Inheritance Angel-Basically self-explanatory, the inheritance angel has recently come into some money.  However, he/she does not want to squander the money.  Instead, investing the money, in hopes that it will grow is the goal.  While some may be business savvy, others simply are hoping to have received good financial advice.
• Newcomer Angels-People new to the world of investing in small businesses have come into money.  They get together as a group and find a mutual cause to pool their money and invest.  Oftentimes, it is a one-shot deal.  They do not usually make it a practice to become investment angels.
• Do-Gooder Angels-Generally, these angels want to invest in small businesses or companies that provide a valuable service for the community or mankind in general.  For example, if you are researching and developing a new drug to fight cancer, or your business will benefit the community in some way, do-gooder angels want to help make sure you get the chance to make a difference. So far, all of the angels are basically good.  Yes, they want to make money.  But, they also want to help someone with vision to succeed.  But, not all angels are simply out to get a return on their investment, or give a new entrepreneur the opportunity to prosper.  Some have ulterior motives that can kill your dream.
• Dark Angels-Individuals who have underhanded motivation want to use you to further their own agendas only.  They keep their toe in the proverbial door.  Once you start enjoying a modicum of success, these people muscle their way in, and they literally take over the business.  You have done all the hard work of laying the foundation.  Then, they come in and reap all of the profits.  Before you know it, you are on the outside looking in, and wondering how your dream now belongs to someone else.

In short, the world is full of different people, with different personalities, experiences, and goals, who will be willing to become angels and invest in your business.  However, as the businessperson, you need to be able to identify you angel, so you know what to expect and can protect yourself against the investor that wants to steal your success.

Especially in hard economic times, finding investors and lenders to support your business can be extremely difficult.  So, instead of giving up on your dream, you are considering alternative sources for funding your small business. You do have other options.  But, before you make any financial business decisions, it is important to understand the pros and cons of alternative business funding.

The financial decisions for your small business made today can have long-term affects for tomorrow.

So, you need to make well-informed choices, especially if you are considering non-traditional business financing via:

•    Customers
•    Purchase Orders
•    Credit Cards
•    Alliances/Mergers
•    Leasing vs. Buying
•    Employee Stocks
In brief, you can get some idea of how alternative money sources can work for small business.  But, it would definitely be advisable to seek professional counsel and consult your business lawyer.

Customers

Having multiple sources of financing is a good idea for small businesses, as long as you are fully aware of how the arrangement and payback will work.  A prime example is your customer.  For purposes of example, pretend you own a soda factory.  One of your best customers has a fast food chain that counts on your marvelous beverage for its customers.

However, you have a vital piece of equipment that needs to be replaced, if you are to stay in business.  So, you might go to your customer, explain the situation, and offer to provide free product until the cost of the machinery is paid for in full.

For many small businesses, developing a mutually beneficial relationship with other entrepreneurs is great.  But, you also need to make sure the details of the exchange are reasonable and down on paper.  Why?  What happens if you client decides you should substantially increase you monthly supply of soda?  In fact, if you acquiesce to their new demands, you will not be able to supply your other clients, pay your employees, or invest in the invention of new flavors.

Customer financing can work, if you treat it as a legal transaction. You simply need to protect your interests as well as maintaining a good relationship with your customer.

Purchase Orders

Purchase orders are already money that is destined to be paid to your business. So, how can they be an alternative source for funding?  If all of your purchase orders were paid in full, you might not need money for your small business.

In this case, your bank, with whom you have already developed a good business relationship, will consider your income ability based upon your stack of purchase orders.  Then, the institution might loan you money to increase your inventory or do something to improve your business, while you are waiting for those purchase orders to be paid in full.

The loans are generally short-term and carry a hefty interest rate.  So, careful consideration is important.  If your vision shows your small business growth changing substantially for the better, because of a purchase order loan today, then it might be well-worth the risk.

Credit Cards

Using credit cards to fund your small business can be extremely risky.  But, if you are very good at managing your credit, and know it will only be a temporary solution, until customer payments arrive, it can be done.  However, you should know that the interest rates can be almost 25% of the total purchase.  It is not quite like seeking financing from a loan shark, but it can feel like it, if you are not extremely careful.

Business credit cards can be great, if you know you will be able to pay off the balance in the next month or two.  Otherwise, the high interest rate can bankrupt your business.  However, if the account is used often and paid in full every month, it is a great way to gain frequent flyer miles for cheap/free business trips.  Simply be careful.

Alliances/Mergers

If you feel like your business is drowning in the flood of competition, a merger or alliance can be beneficial.  But, you role as owner will drastically change.  In fact, if you merge with a larger company, you may simply be bought out and lose your business dream altogether.

If you want to keep up with the large competitors, and still maintain some measure of your dream, you might be wise to create an alliance or merger with another small business.  Then, you can battle the larger competition together, and still have some control over your small business venture.

Leasing vs. Buying

Another alternative source for funding is simply to lease your building or equipment.  In the end, it may feel like you have paid more than necessary for your business needs.  But, it can help free up the monthly cash flow needed to grow your business.  Someday, you can invest in your own equipment and building, after you have experienced a modicum of success.

Employee Stocks

Today, many businesses are turning to employee stocks to help finance the venture.  Employees are offered the opportunity to essentially buy into the company that gives them grocery money.  Sometimes, stocks are in lieu of a raise or a bonus.

In tough economic times, it might be the alternate source of funding that keeps the business doors open.  The employees are willing to sacrifice a little because they now have a vested interest in a piece of their company; and they get to keep their jobs.

So, if any of these alternative sources for financing your small business sounds viable to you, discuss your options with your business lawyer. You can keep your dream enterprise alive.

The old saying, “It takes money to make money” is true.  Whether you have the traditional brick and mortar business with a street address, or you are an Internet entrepreneur, you will have to use some capital to get started and stay competitive.  But, you are not alone. Other enterprising people have gone down the same road you now travel, and they understand the challenges you face. Thus, you have 4 ways to finance your small business.

Financing your small business rarely comes from only one source. Unless you have inherited a thriving business, you will probably use most, if not all 4, of the following options:

1.    Your Own Money
2.    Friends and Family
3.    Commercial Loans
4.    Private Investors

To limit yourself to only one or two financial business resources can make or break your entrepreneurial dreams.  In addition, it can restrict your ability to stay competitive or achieve true success.  So, it is important to be open-minded and consider all your financial options, when the need arises.

Your Own Money

Before you ever ask anyone else for help, you better be prepared to finance your small business with your own money.  You cannot expect other individuals or businesses to make any financial risk on your enterprise, if you do not believe it will be successful.  So, if you have not put yourself in any financial risk, do not expect others to hand you a check.

For example, your savings will probably be the first to be depleted.  If you have a bunch of money in the bank, why do you need assistance from other resources?  You might even have to get rid of the fancy car and drive a second-hand auto for a few years.  You will probably have to postpone the family vacations for a year or more.  Even shopping for groceries might have to include no-name brands, clipping coupons, and foregoing the tasty little extras.

If you really have faith your business will become a profitable success, the sacrifices you will make today will be easier, because you know your personal and financial goals.

Friends and Family

Much of small business capital comes from friends and family. People you love will often share your dream of entrepreneurial success.  They would like to be in on the ground level as investors; but, they are also willing to risk money because they believe in your ability to succeed.

However, you need to approach friends and family carefully.  Do they really have the money to spare, without putting their own families in financial jeopardy?  Will there be hard feelings, if something goes wrong and they lose the money?  Do they understand that profits will not magically appear overnight, and you might have to turn right around and reinvest some of the proceeds, in order to expand?

Finally, even if they are loved ones, do not take money from people in your inner circle without getting it down on paper.  Make some sort of signed contract, so there is no ambiguity, if relationships should become strained later on, or to prevent them from becoming strained in the first place.

Commercial Loans

Especially if you have achieved a modicum of success, you may want to consider obtaining a small business loan through a bank.  However, you need to be aware that the finance charges can be large, and the consequences can be devastating, if you default for any reason.  Some self-assured entrepreneurs have lost their business, their home, and their families, because they put everything on the line without fully counting the true cost beforehand.

Generally, you will not be able to obtain commercial loans, unless you are willing to sacrifice enough collateral to satisfy the bank.  A lien will probably be placed on your house, or you will have to take out a second mortgage.  If your car is paid for, it might not be anymore.  Frankly, you will need to consider all your options from a business standpoint and leave your heart at home. Count the cost before you sign on the dotted line.

Private Investors

Another small business financial resource is private investors.  Also known as angel investors, people you may not even know may be interested in helping you achieve financial success.  In short, your success is also their success.  But, they are also cognizant of the financial risks of investment.

Many private investors have been small business entrepreneurs at one time.  Thus, they are simply interested in helping other hard working people succeed.  Others want to get in on the ground floor, with the hope that you will become the next Bill Gates and make them rich.  Either way, they know it is not a sure deal.

In summary, your small business needs capital, whether it is paying for a website, or you are starting a traditional business in your town.  Naturally, you will throw your own money into the pot.  But, if that is not enough, you may need to seek help for your small business from friends and family, angel investors, or commercial loans.  If and when your entrepreneurial dream is realized, you and your investors will achieve financial success combined with personal and professional satisfaction.