Borrowing money can be smarter than raising equity. Here's why, and what else you need to know.
What's the one thing that can quickly take a great idea from a hobby to a full-blown business? Money.
Getting a loan for a startup is a tough proposition. But, in many cases, it can be a smarter plan then raising equity. When you take on equity investors, you're getting married for life. Lenders will eventually go away when you pay back the debt, and they'll leave you in control of your company.
Here are several things you should know about borrowing:
Consider how much collateral you have to put up. Take a close look at your personal assets, and decide what, if any, you are willing to put up as collateral. Startup owners who are able to put up 100% collateral for the loan amount will have a much easier time acquiring a business loan than those who are not. Collateral can be in the form of home equity, stock, cash savings or deposits, equipment, business inventory, or other hard assets. That being said, don't forget the basics of a collateral loan when you're looking into what you can offer a bank: If you pledge the asset as collateral and your business goes under, the bank can take the asset and sell it to recoup its money.
Want to franchise? Make sure it's SBA approved. If you're thinking about starting a franchise, be sure to pick one that is on the SBA Franchise Registry. An SBA loan is easier and faster to acquire if the franchise is SBA approved because the process for loan review is streamlined and the application process is less intensive. If a franchise is not listed on the SBA Franchise Registry, the loan process will likely take much longer and the chance of getting the loan is not nearly as high.
If you have a B2B company, you may want to borrow by "factoring." Remember that if you're starting a business-to-business company, you will have an easier time obtaining startup financing then if you're starting one aimed at consumers. The reason for this is the minute you have invoiced your business customers for products or services, you'll be eligible to "factor" these invoices, and receive a significant advance on them while you wait to be paid. A factor then collects the full amount from the customer when your product is delivered, and pays you the balance amount after deducting a fee for the transactions.
Or, get a lender to pay your supplier in advance. In addition to factoring, if you're selling a product, you may also be eligible for "purchase order financing." In these transactions, a lender advances money to your supplier in order to get your product out the door and shipped.
Lease, rather than buy, your equipment. Finally, you might lease whatever equipment you need for your startup. In many cases, leasing companies will let you lease based purely off of your personal credit. Buy some time to pay for your equipment, and preserve your cash.
In addition to figuring out your best option to obtain capital, you'll need to determine how much money your startup really needs. You don't want to borrow too much without a concrete plan on how you'll pay it back. I'll be writing more about this in coming weeks.
AMI KASSAR is founder and chief executive of MultiFunding, which helps small-business owners find the best business-loan options. Kassar speaks regularly at universities and small-business events about entrepreneurship and access to capital. He has an M.B.A. from the University of Southern California and a B.A. in American studies from Brandeis University. He lives in the Philadelphia suburbs with his wife and two children. @akassar