Q: Might you be able to suggest any other ways to finance a business, other than the usual suspects like loans, crowdfunding, credit cards, and the like?

 

A. You bet I can. In my book, Get Your Business Funded, I share more than a dozen creative ways to fund the dream. Here are two of my favorites:

 

1. Factoring

 

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Factoring is a process that a lot of companies use when they need a quick infusion of cash but don’t want to, or can’t, get a bank loan or other financing. Instead, they sell an upcoming payment that is due, that is, an invoice, to a company (called a factor) for an immediate payment of a discounted fee.

 

There are several great things about factoring:

 

  • It is quick. Once you find the right factoring company to buy the asset, it is simply a matter of their verifying the amount due and then getting you the money. Usually it’s no more than a week.
  • There are few forms to fill out.
  • Your credit rating is irrelevant. Instead, it is the credit of the entity that owes you the money that matters. Once the debt is verified as due by a legitimate entity, you get the money regardless of your financial situation.

 

There are downsides, as well::

 

  • Usually (but not always, see below) the company that owes you the money will necessarily be made aware you are using a factor and selling the money owed; the factor will contact them so that the factor is paid directly by that company.
  • You will get less than 100 percent. How much less? It depends upon various factors (ha!), but it should be somewhere between 85 percent and 98 percent.

 

The good news is that factoring is changing with the times. One company I like a lot is called Fundbox. Fundbox offers a few different funding options, but for our purposes here, what I love is that its factoring/invoice funding remains private; your customer need never know you sold their invoice.

 

2. Seller Financing

 

This is a great option for startups.

 

When you want to be an entrepreneur, there are all sorts of ways to get into the game. You could start a business from scratch. You could find a partner. You could buy a franchise. You could invest in a business. But of all of the options, one of the best is buying an existing business.

 

Buying an existing business is usually a good idea for several reasons:

 

  • First, it is less risky. With an existing business, you can look through the books and get a good idea of what you are getting and how much money you can make
  • Also, the brand and goodwill are already established; you won’t be starting from scratch
  • Additionally, there is already a client base
  • Finally, you can sometimes get the current owner to help finance the purchase

 

That last point is the one we need to emphasize here. Seller financing is where the seller helps you, the buyer, buy the business.

 

Say what?

 

Yep, you read that right and it occurs more often than you think because it is a fairly risk-free way for a seller to effectuate a sale. Here’s how it works: The owner of a business will find a suitable buyer who may need some help financing the deal. The owner, if amenable, will agree to take a promissory note as whole or (far more often) partial payment for the sale of the business. In real estate, this is known as “carrying the paper.”

 

The reason a seller would be open to this sort of deal would have to be that the buyer offers him or her a solution. Maybe the business isn’t selling. By offering the owner the chance to sell it (if they carry some paper), the buyer kills two birds with one stone: They get the needed financing to buy a business and the owner gets to sell a business. The buyer becomes a solution to the owner’s problem.

 

Additionally, the seller may agree to seller financing because:

 

  • The seller should get an ongoing payment that is typically more than she could get from another investment
  • The seller knows that the loan is safe because the business is viable

 

How much will the seller finance and what does a deal look like? It really depends upon the circumstances but suffice it to say that 100 percent deals are rare. Not impossible, but rare. Far more likely is a deal where a business owner will agree to finance up to 50 percent of the deal. There will be no negotiating over the asking price and the interest rate will be a bit higher than the going rate. The note is usually due in five years, and monthly payments are expected in the meantime, with a possible balloon payment due upon maturity of the note.

 

All in all, seller financing is a good solution for the cash- or credit-strapped wanna-be entrepreneur.

 

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About Steve Strauss

 

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Steven D. Strauss is one of the world's leading experts on small business and is a lawyer, writer, and speaker. The senior small business columnist for USA Today, his Ask an Expert column is one of the most highly-syndicated business columns in the country. He is the best-selling author of 17 books, including his latest, The Small Business Bible, now out in a completely updated third edition. You can also listen to his weekly podcast, Small Business SuccessSteven D. Strauss.

 

Web: www.theselfemployed.com or Twitter: @SteveStrauss

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Bank of America, N.A. engages with Steve Strauss to provide informational materials for your discussion or review purposes only. Steve Strauss is a registered trademark, used pursuant to license. The third parties within articles are used under license from Steve Strauss. Consult your financial, legal and accounting advisors, as neither Bank of America, its affiliates, nor their employees provide legal, accounting and tax advice.

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