Raising Cash or Other Peoples Money

At some time during your business ventures raising money will be necessary. Getting people to lend you money when you need it is difficult. Borrowing when you do not need to is much easier. As hard as it is to borrow money it is even harder to pay it back.

My advise is don't borrow if you can avoid doing so. Try every thing else first and if you must borrow have a plan on how you will pay it back. Then have a back up plan or two, as you will more then likely need them.

I have never been afraid to borrow money and over the last thirty years or more I have had bank credit lines, vendor credit lines, floor plan credit lines, equipment financed deals, credit card balances at such high numbers that it would scare you, business mortgages, and other loan types including business partners. I will say this about the loans, spending the money was easy and paying it back was always difficult. It was always easier to get the money when I didn't need it and always very hard to get it when I needed it badly.

The following is a brief discussion of many of the varied sources of capital, to give you some ideas for further research.

Partners: Raising money from business partners or using partnerships has one advantage, no monthly payments. The bad news is you have to deal with the people and the restrictions that causes. I have had to buy out every partner I ever had. But for start up money it is sometime the only money available.


Family: Raising money from family is the same as from partners with the added danger of bad family relations because of the personal aspect of family dynamics. I have always taken money from family with reluctance and always with proper paperwork and documentation to avoid any mis-understandings.

Last resort: Think of everything you can do to reduce the need for extra cash and do them first. Cut your over head, lay some one off, barter, do with out, trade goods and services, and so on. Paying back loans creates interest expense and restricts future cash flow uses.

Bank loans: Bank loans are secured loans and banks all most always require a personal guarantee. A bank will want assets they can secure the loan with, two years tax returns on you and your company, a copy of your business plan, a personal financial statement, a list of intended loan uses, and a plan on how you will repay the loan. Your bank loan will be at a floating rate, prime plus 2% or LIBOR plus 2% or something similar. As the fed rate goes up so does your payment and interest rate. Bank loans are easy to get when you do not need them and very hard to get when you do need them. Banks will require updated paper work from you annually.

Mortgages: Home type loans are easiest to get and the least costly. Business mortgages generally require thirty percent down and a strong financial statement and balance sheet. Most mortgages are written by banks. Try the banks directly before using a loan broker as it is often cheaper. The intrest rate will float as on other bank loan. Fixed intrest rate loans often are 2% point higher then the floating rate. The loans are often written for two to five year terms and with a balloon payment at the end. Banks also make SBA guaranteed real estate loans and might include a line of credit loan or equipment along with the mortgage. The SBA backed loan is a 10% down loan, often at a twenty years amortization and the line of credit loan can be ever-greened (pay interest only) for five years. SBA backed loans are for owner occupied buildings.

Small business development loans: In most major markets there are organizations who make loans to small businesses. The purpose of these lending organizations is to promote locale business and to create jobs. Each of these organizations have their own specific requirements and limitations. Search them out as they can be a good source for flexable funding.

Factoring: Factoring is the selling of your receivables against future collections. Typically a factor company will advance you money based on the invoiced amount of shipped goods. They advance you typically 80% on the invoiced amount and get paid when the customer pays you. The cost is typically 2% of the amount advanced. Most factors want at least a million dollars of factored invoices a year to be even considered. This is very expensive money.

Equipment loans: Many a seller will offer loans on their products at favorable terms. It usually is worth comparing the loan they offer to any other financing you have available. Equipment is depreciated on your balance sheet if it is financed.

Equipment leases: Easy to get, leases are expensive money, typically 24% plus per year. Look for hidden fees and hidden taxes. Shop around, rates and terms vary wildly. If you lease equipment do not pay property taxes on the equipment as the lessor will bill you for the property taxes annually. You will also be paying property taxes on the full purchase value until the lease is payed off, (a tax rip off) and leases can have unstated charges such as payment of residue value at the end of a lease to keep the equipment. Hint; that residule fee is pure profit to the lessor so negotiate it way down, or he has to pay to pick up the equipment from you at the end of the lease. Often the equipment is over priced as well. You have been fairly warned of the possible perils of leases. Leased equipment is expensed on your P&L as the payments are made rather the depreciated. It is often referred to as off balance sheet financing.

Vendor Terms: Many companies offer vendor terms (referred to as invoice dating) Typically a company sells you product and you pay the invoice at a future date. IE: a company sells you product with six months dating, with payments due 1/3 may, 1/3 June, 1/3 July, or some similar payment plan. Most of these companies will offer you large prompt payment discounts if you for-go the extended terms. Many a company gets in trouble because of dated terms, they over buy and when sales are less then anticipated they can't pay the invoices and then the interest kicks in and bad relationships with vendors result.

Sale lease back: If you own a valuable asset you might be able to sell it then lease it back.

Credit card factoring: A company advances you against your daily credit card receivables. Typically the company offering this type of lending becomes your credit card processor, and then advances you 80% of you average monthly credit card volume. They take the money back by keeping a percentage of your daily credit card processing. IE: if you do $100,000 a month in credit card charges to your customers you might get an $80,000 loan, then pay it back daily as you run credit cards. If you run $100,000 of credit card transactions amonth, you would pay back $30,000 the first month. The interest rate is high and the fees paid for the credit card processing may be higher then the going market rates. Credit card factoring can be very expensive money.

Peer to Peer borrowing: On line borrowing is available just do a Google search for peer to peer lending. down side is hi intrest rates, good to fair credit being the only criteria. The amount you can borrow is limited.

Credit cards: You can use credit cards to borrow if you pay on time and can stand the high payments. If the cards go to maximum rates or you have late fees you can get buried real fast. Use them wisely and they will help you over the rough spots. Just keep in mind credit cards can be an easy trap to get caught up in.

Limited partnerships: These are regulated by the individual

states and there are limitations on advertising and the number of partners allowed. See The Making Of A Real Estate Limited Partnership

Selling stock: The sales of securities are regulated by state laws and by the security and exchange commission. I have not found an inexpensive way of issuing stock to the public. Private stock issuing is very easy, your attorney can set up your corporation and issue the stock. If you are going to sell stock to the public get competent legal advice and plan on a cost approaching 30% of the value of the stock issued. Anything under a million dollars probably is not worth doing.

Regulation “D”: This regulation allows you to sell stock on a limited basis without file-ing with the SEC. See http://www.sec.gov/answers/regd.htm

Borrowing from your customers: You can, kinda. If you take credit cards you can charge the customer in advance and use that money to order the goods. Depending on your credit card sales volume this can be tens of thousands of dollars of float depending on how many of your vendors will bill you for payment in thirty days.

Vendor credit: Many of your suppliers will bill you on varying  terms from seven days, to as much as 90 days. Just ask for terms. It is not unusual to have tens of thousands of dollars owed to vendors.

Tax liabilities: These are loans in reality because you are collecting or saving the tax money to be remitted to the taxing authority at a later date. The tax liabilities might include payroll taxes, sales taxes, income taxes, security deposits, and property taxes. Plus any other moneys held in trust.

Seller of a business: All most all sellers of a business have to finance some part of the sale. If you are buying a business get as much financed from the seller as you can.

Franchising: Expanding your business by franchising is one way to grow a business. Franchising is a regulated activity and the cost of compliance can easily exceed a $100,000 plus the cost of getting your concept ready for your franchise's. If you are buying a franchised business your franchiser may well offer financing to get you started.

Venture Capital: Venture capital firms seek very high rates of return, and take a minority interest in the companies they fund. The venture firms are usually looking for companies in a specific stage of development based on their firm's criteria, start up funding, first and second stages, expansion and buy out. They look for huge potential and a way to cash out in five years or so.

State venture capital funds: some states have state sponsored venture funds. These are funds set up to promote business in the state and create jobs or spur growth in a specific industry that is of importance to that states goals.

Home equity: Borrowing using your home as collateral is a low cost way of raising money. This type of loan is very popular with start up ventures as it requires the least amount of paperwork and scrutiny.

Credit unions: Recently credit unions have changed their focus and they might be a source of business loans. They do home equity and other personal loans as well.

Others: Insurance companies, thrifts, commercial lenders, employees and individuals are all possibilities. You will find this group of lenders not very fruitful. Some insurance companies have venture capital funds. Employees are a source if you want to do an ESOP stock offering. Commercial lenders are most often reaches via a loan broker. Individual lenders are relationship type loans, so who do you know who likes you that much?

Loan Brokers: Loan brokers work on commission. If the loan broker wants money in advance? Run for the nearest exit. The broker should be paid from the loan, at the loan closing in all cases. Loan brokers will need lots of documentation and information on you and your business. brokerage commissions vary wildly, as do the minimum amount of loan they will work with. Most specialize in a particular field or industry. I have used loan brokers twice and paid 2% of the loan amount each time.

Hard Money Lenders: Hard money, refers to money secured from private lenders who lend money at high intrest rates. They are common in the used car business, house flipping business and similar business that are not favored by banks. Most hard money lenders like short terms and rates of 20% to 40% on their money.