Most businesses run on debt. Beginning with small-business loans and surviving on credit cards, lines of credit, microloans, cash advances, and more, businesses acquire most of their funding by borrowing it. On one hand, this motivates business owners to make their businesses profitable ― but on the other hand, acquiring so much debt is rightfully terrifying. In many instances, business owners are personally liable for business debts, and creditors can pierce the corporate veil to pursue personal assets like homes, cars, and retirement accounts if a business goes under.
Thus, many business owners try to avoid debt whenever possible. Fortunately, there are a handful of funding methods that allow owners to acquire the money they need without incurring debt, and they are as follows:
Bootstrapping is perhaps an idealistic funding method ― one that only a few entrepreneurs can manage with any success. It demands business owners generate funding for their business using their personal assets and accounts or those of generous family and friends. As one might expect, this requires quite a bit of back-bending when it comes to budgeting, so the resulting business often gets off the ground slower than a fully funded business might. Often, owners and employees don’t get paid for months or years; plans must be put off or compromised due to funding issues; typical business needs, like a true office space or business cards, are out of reach; and every single cost must be negotiated. Those entrepreneurs who are already flush with cash will find bootstrapping easiest to achieve.
Still, bootstrapping has its advantages. For one, it doesn’t necessitate debt. For another, owners do not have to relinquish any control of their business, which is particularly positive for those with precise visions of their future business. However, entrepreneurs must be careful not to sink too much of their personal wealth into a risky venture, or they might lose even more than if they had taken out loans.
Crowdfunding isn’t new, but relatively new tools to aid businesses (and others) in funding endeavors have made this method particularly popular. Crowdfunding allows business owners to collect funding directly from their target audience. For this reason, crowdfunding is effective as a marketing campaign and a market analysis tool as well as a fundraising campaign.
The process seems simple: Entrepreneurs explain why they are requesting money, and people who support the project can donate varying amounts of money. Various sites, including Kickstarter, Indiegogo, GoFundMe, Fundable, and more, facilitate the process even further, allowing potential investors to find projects that might be of more interest to them. Additionally, many entrepreneurs reward their customer-investors with gifts, such as preorders of their products, promotional swag like shirts and stickers, and more.
However, crowdfunding is far from free and easy. Fewer than 1 in 3 crowdfunding campaigns reach their funding goals ― and on some websites, that number is closer to 1 in 10. Because crowdfunding seems like an easy way to make cash, the web is filled with hundreds of thousands of campaigns, and entrepreneurs must work extremely hard to gain visibility. Even when a business gains funding, websites take a percentage of a campaign’s earnings, between 4 and 10 percent depending on funding goals, payment methods, and more. Therefore, crowdfunding is only a viable option for businesses with flashy ideas and owners with some marketing genius.
Though invoice factoring as a concept has existed since time immemorial, not many business owners are aware of this cash-flow salvation. Also called accounts receivable factoring and accounts receivable leveraging, factoring allows businesses to sell their accounts receivable ― i.e., unpaid invoices ― at a small discount to a third party, immediately freeing up cash that might otherwise not be paid for several weeks more.
Truly, factoring is a lifesaver for many businesses, particularly those that are highly seasonal and struggle to regulate their cash flow throughout the year. However, factoring isn’t for every business; only those that have business clients or government contracts qualify. What’s more, businesses must be relatively stable, which means startups under two years or so should not apply.
Many entrepreneurs dream of an angel investor who leaves millions of dollars on their doorstep with merely a wish for business success. However, rarely do investors behave such. Both angel investors and venture capitalists require courting, incessant pitches of business ideas and plans, and seemingly unending lunches and galas. Then, at the end of the dance, entrepreneurs who manage to attract positive attention from an investor or VC are shackled with a business partner who might steer the company in a completely different direction.
Investors can provide the money business owners need, but there will always be a catch or two that pollutes the cash. Unless an entrepreneur has a brilliant idea and requires millions to fund it, a small-business loan is preferable to this funding alternative.