Less Common Forms of Business Funding - Explained
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What are some less-common Methods of Financing Business Operations?
Specific types of business operations may allow for unique ways to finance operations outside of the traditional debt or equity relationships. Several of these approaches are discussed below:
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Contractual Business Sales
- In the event you are purchasing an existing business, rather than starting a new venture, then see if the current owner is willing to sell the business on contract.
- In this scenario the seller of the business finances the purchase. The seller may be more flexible in interest rates and repayment terms than a traditional bank.
Inventory & Supplies
- Try to establish trade credit for the purchase of inventory.
- You may also try the Sell-before-build model.
- Your customer essentially finances your inventory.
- Exchange goods for goods or services for services with suppliers.
- Also, there are numerous third-party sites that focus on facilitating bartering between individuals and businesses.
- Some businesses are able to securing financing from their customers.
- This is particularly true in Business-to-business (B2B) companies.
- It may require you undertaking or completing substantial services for the customer before they will undertake the financing (loan or equity investment) for your business.
- If you have existing customers, they may be willing to pay you in advance for your products. This allows you to use their money to purchase products or inventory prior to sale.
- Purchase on credit
- Trade in older equipment
- If the equipment lifespan is short, investigate leasing or financing through the seller.
- Selling or borrowing against your accounts receivable
- Consider leasing.
- Remember, you still have to come up with 80% to purchase
- Loan term is generally 18-20 years for commercial mortgages.
Evaluate Leasing Operational Assets
- Leasing companies are a way to finance computers, office equipment, phone systems, vehicles, and other equipment. Leasing can lower your start-up costs because you won't have a large initial outlay of cash for the equipment.
- Much of the required expenses of startup can be leased.
- This avoids the large, upfront costs and allows for periodic tax-deductible payments.
Grants for Small Businesses
- A grant is money that doesn't have to be repaid.
- Usually made available from the government or a not-for-profit agency (IRS Pub 557).
- Usually charitable
- If you are not a not-for-profit organization, then the availability of grants are limited.
- Example: Small Business Innovation Research Program (SBIR)
- When developing technology that may be of interest to the Government.
- Very competitive program that grants money to small business to explore technology and incentivizes the business by allowing commercial profitability.