(as submitted by Dave on the December 17 edition of TAE)

There are many ways an entrepreneur can go about funding a business for both the startup and growth phases. On December 17, Dave detailed these methods, and categorized them four ways.

1. Operations – There are five major ways a business can get funding via the day-to-day operations of the business.
   • Customer payment: One way is to encourage customers to prepay for the good or service, thus ensuring a healthy amount of capital up front. One way to do this is to establish some sort of discount for payment in advance, be it 10% or even 50%, depending on the industry. While this is common practice for industries that produce goods, it’s a growing practice for industries that produce services, such as accounting or plumbing. Be careful not to encourage too great a discount, however, for fear of ultimately losing money when all is said and done. Pay attention to your margins.
   • Factoring accounts receivable: Another way to secure some capital for your business is to leverage the money that you bill your clients for your good or service. One thing you can do is process your accounts receivable through a factoring company. You can take an outstanding invoice to a customer, then sell it to a factoring company for a percentage of the amount of the invoice (generally 75-80% of the invoice is a good number to shoot for). The factoring company would then be responsible for collecting the entire invoice amount from the customer. You then have a substantial amount of your invoiced dollar amount in hand, without the hassle of spending valuable time and resources chasing down clients in order to collect the entire amount.
   • Accounts payable: - Upon purchasing a piece of equipment from a vendor, try to negotiate a payment plan such that you end up paying for the equipment over time, maybe via a monthly or bi-monthly plan, rather than paying the entire amount up front.
     Another tactic may even be more effective, but also more tricky, as it usually requires a healthier customer/vendor relationship. Don’t be afraid to offer a vendor the promise of multiple referrals in exchange for a discount to you for the good or service that vendor provides. If you can successfully promise a vendor that you can land them a number of potential customers in exchange for a discount on the things you purchase, a smart vendor would be more than willing to trade a short term percentage discount on one customer for multiple customers a month or two down the road.
   • Purchase commitments – Offer your vendor an exclusive purchase commitment over a period of time (maybe a year or so) in exchange for a discount on goods services, or even an up-front payment. A great example of this would be the “pouring rights” that major soft drink companies bid on for major events, such as the Three Rivers Regatta. If Coke, for example, pays $50,000 for the rights to exclusively be sold at the event, it’s a short term expense for what will ultimately be a major gain for Coke, and it gives you a nice amount of capital with which to operate.
   • Government grants – These are very complicated to procure, but they can be effective. Certain organizations offer a self-employment assistance program, where you can get working capital for the initial stages of your business, generally by leveraging such sources of income as unemployment payments.
     (and when you’re all tapped out of operational resources….)
2. Debt
   • Bank/SBA loan – rather than pay a ten or twenty percent fee for a factoring agency, take on a bank loan to pay only seven percent interest.
     And if you need to, contact the SBA in hopes of getting them to guarantee the loan, thus making the bank loan a little easier to procure.
   • Leasing equipment – You can purchase the equipment you need to start a company through a leasing company, thus putting you on the hook for monthly payments for that equipment. While you’ll have immediate access to everything you’ll need to get your business up and running, you’ll also carry the responsibility that goes with it.
   • Family and Friends – There’s always the option of hitting up those close to you for a loan to get you off the ground. Depending on who you ask, this could be a successful method, but in the long run, it really isn’t all that advisable an option, lest business issues and problems get in the way of personal interaction.
     (and when your debt options are tapped out….)
3. Equity
   • Angel Investors and Venture Capital – One of the most popular means of securing financing. There are plenty of individuals and companies out there looking for the right company in which to invest. If your business plan, and your ability to present it, is up to snuff, you’d be able to get as much money as you need, in exchange for giving up the corresponding stake in your company.
   • Giving your staff and employees “skin in the game” – Rather than paying a straight salary to your staff, give them some equity, provided they’ve worked hard enough to earn the right. Traditionally, employees who have equity in a company tend to work harder, so that they can share in the resulting profits.
   • Friends and family – Much like debt financing, you can offer your loved ones a stake in the company in exchange for the capital you need. Also not advised as a means of financing, as you’d be giving up control of your company in addition to the potential for personal relationships to suffer as a result of business problems.
   • Going public – The Initial Public Offering (IPO) is generally associated with the big “payday” for a company’s funding prospects, but it’s also subject to the most scrutiny, especially in recent years thanks to Sarbanes-Oxley and other similar restrictive legislation.
   • Private Placement – The other big payday comes without the government legislation of the IPO, so it’s generally recommended as a way of getting a healthy amount of working capital, but without all the rules and regulations of a public company.
     (And if you’re in desperate need of a last resort….)
4. Hard Money (ill-advised)

   Generally, there are sources of funding that you should not touch under any circumstances with the goal of financing your company. One such source is your 401K savings. If you touch the savings before the traditional maturation period expires (when you turn 59 ½), you’ll pay a severe penalty for the right to do so. You could also use your credit cards to finance your businss, but the interest is potentially back-breaking in the long run, should you not be able to pay your bill on time and in full. Borrowing against your home equity or your life insurance are also not advice, in addition to (once again) relying on friends and family members.

As you can see, there are a lot of options out there to get the money you need. Some of these are more beneficial than others. As always, Dave advises that whatever you do, be sure to consult with a financial planner before you do anything towards securing financing.

For more information, contact Dave at Wilke and Associates at (412) 278-2200 or online at www.wilkecpa.com.