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How Start-up Capital Works

Using Your Assets

There are many creative ways to get the financing you need to get your business off the ground. Here are just a few to get you thinking.

  • Equipment Leasing - Also known as lease financing, this is an excellent way to finance your start-up if your primary need for the cash is to buy equipment. When you lease equipment, you make a monthly payment, but usually have the option to buy the equipment at a fairly decent price at the end of the lease. Also, by leasing your equipment, you'll be adding no burden to your balance sheet because leases aren't listed. You may also improve your chances of getting other loans because you're building a credit history with the lessor.
  • Factoring - Factoring allows you to collect cash immediately based on your accounts receivable. If you've had problems getting funding from other sources, then this might be an answer for you. With factoring, you are basically selling your receivables at a discount, so you're not collecting as much as you would if you waited until the customer paid, but you get the cash immediately and can put it back into the business. Firms who offer this service may charge from 2% to 10% based on the amount of the total receivables, and then they are responsible for all collections.
  • Convertible Debt - Convertible debt can be good for everyone (as long as you don't mind handing over a piece of the pie). It sets an environment for your lenders that will let them monitor your company's progress, and if your company does well then they have the option of converting their loan into an investment.
  • Asset-sale Lease-backs - This may work for you if you own a lot of expensive equipment, but have little cash. You can sell your equipment to someone who will then lease it back to you. You get a cash inflow for your company and pick up a monthly payment for the equipment lease. In some situations it is ideal.
  • Purchase Order Advances - As a last resort, you can sometimes use customer purchase orders to gain some funding. A lender may advance money for sales based on purchase orders you hold. This type of funding has high rates, so use it wisely.
  • Limited Partnerships - You can form a limited partnership for your company. This sets you up (typically) as the general partner who bears all of the financial risk, while allowing your limited partners to invest funds but not be held liable for losses other than their original contributions. Check with your state's requirements for limited partnerships.
  • Private Placement - You can offer stock in your company privately without having to register your company under federal securities laws. Check with your state's requirements and have your attorney look into it. Typically, you can use private placement for stock offerings of up to $3 million or 35 investors.
  • Employee Ownership - You can also offer ownership to your employees. In order to do this, however, your company has to be set up as a partnership or as a corporation. TIP: Be careful that you've selected your employees wisely.
  • Joint Ventures/Strategic Partnerships - Match your product, assets, and needs with another company's products, assets and needs and pool your resources. Make sure the match is indeed made in heaven by having your attorney check out the deal and have any necessary documents drafted to protect your interests.