Six Ways to finance your Business Project or a Contract
Being a business owner is not easy, there are many aspects to consider and a lot of work to do. You need to be able to find financing for your project or contract. This can be difficult as a new business because so much of what you need is money upfront. If you are experienced in finance, this may not be as problematic. But if you have never even considered it before, don’t worry! Here are some tips on how you can go about looking for that loan or financing necessary for your next big business opportunity.
The Real Cost of Your Business
Let’s start with the real cost of your business. When you look at the cost of doing business, they are not all equal when you look at it from an accounting perspective. You need to look at all of the expenses by category and understand exactly how much money you will be needing to cover these. It is best to understand this before you start marketing your project or contract because salespeople can have some pretty amazing terms and conditions that a lot of businesses are not used to hearing about. They might take the wind out of your sails before you even get started.
Cash Flow Formula
To really appreciate the cost of starting your business, you will want to use something called the cash flow formula. Because there are so many different ways to finance a business, let’s look at an example of that. Let’s pretend that you need $25,000 for this contract and you know that your contractor will be paying yearend balances. That will mean that your contractor will be paying $25,000 every year. Now, let’s say that you are using 30-year financing over the whole life of this contract. That means that they will be paying $2,500 a month in interest on that debt. And let’s say that this is going to happen every month for the next thirty years. You have got a net worth of $350,000 at the end of it all when you are done with this thirty-year period. But now you have a debt of $350,000. So what does that mean for your net worth? Well, you have a net worth of $350,000 at the end of it all but you also have an extra $250,000 in debt. This means that if something were to happen to your business or any catastrophe happened and you couldn’t pay back your loans then the value of this contract is just the contract itself and not the $350,000 in total assets left to cover those payments.
There are many different variables that go into this calculation and you need to really understand what your costs will be. Not everyone and not every business is the same so you must do your own math. Regardless, this is a good lesson in what it means to start a business as well as how your costs will affect you in the long run.
6 Ways to finance your Business Project or a Contract
1. Borrow From a Lender
The first thing that you will want to do is to borrow from a lender. If you are new to the business, then this might be your only option. It can be difficult if you have bad credit to get a loan because most financial institutions will not lend money to businesses or people with poor credit scores. You may have an easier time if you can borrow from a friend or family member but they might not have the capital on hand at that time. They might also be experienced in business and know the numbers. Just make sure that you will get paid back if you borrow from a family member or friend.
2. Find an Investor or Partner
If you are able to get a loan from a lender, then this is a great thing. But if you do not have any luck finding funding from a lender or even if that happens, what next? You will want to continue on your journey and make connections to investors. If you are undercapitalized then an investor may be able to help you cover some of your expenses so that you can get started with the business of your dreams. This can happen in many different ways.
3. Offer Services and Products to the Community
While that contractor is paying you each month, he probably has money on hand when he gets paid. But if you have a service or product that you can offer to the community, then this is something that might be worth your while because you will be making money while they are paying their bills to your company. You can set up a website and market your business through it. You could even use online classifieds to give it a try. There are many ways to do this, so think about all of your options and research what is available through the internet.
4. Use Equity as a Way to Get Funding
You might be able to use equity to help you get funding for your business. If you have a service or product that others are willing to pay for, then this can be a great way to raise money. You can even take out loans against the value of your business as well. This can give you a nice lump sum of money that you need in order to start. You might have to pay some interest on this money but the funding can be a great start.
5. Tap into Savings and Retirement Accounts
If you already have money saved up in a savings or retirement account, this is something that may sound tempting because it can give you quick capital to do business with. You do not need to file it as earnings but you can still use your assets as collateral for loans or business funding. This is a good thing to know because some banks will allow you to borrow against savings accounts, IRAs, or 401Ks. There are many different ways to do it depending on your personal situation.
6. Look for Government Funding Opportunities
If you do not have the money or any way of getting it, there are many different opportunities for small business funding that you can tap into. The best place to start would be with the SBA website and this will give you an idea of what is out there. But it may also be worth your while to tap into the government as well. The Small Business Administration will have an office in your local area that you can contact regarding this. There will probably be some kind of application process involved so make sure that you are ready for that.
If you are starting a business and need capital but do not want to take on debt then you can use any of these methods in order to raise the funds that you need. You need to make sure that you can afford the debt that you take on so make sure that you know what it is going to cost before making your decision. Once you have this figured out then it will be easy for you to get started regardless of what route you choose.