If you are a business owner, it is very important to get money. But many business owners don’t know the right way to get money and might listen to bad advice from people who think they know what they’re talking about.
You need money to start and run your business. You will need different amounts of money at different times, so you must plan ahead. This is important! Even if you have a good idea and hire the right people, it won’t work if you don’t plan for how much money you need.
Cultivating your financial security
Capitalizing your business is like digging a well. A smart business owner will make sure they dig it as deep as possible so they have enough money for the long term. Or, put plans in place to do that in the future.
There are five levels of money that you need for your business. It starts with the money that the leaders of the business already have. This is not always the best option, but it is often used. It’s better to use other people’s money when you can.
The next way to get money is from people you know, like friends and family. After that, you can ask for credit or loans. Finally, there are investors who might help. It is best to look for money before you really need it because no one wants to give you money if they think you are desperate.
Not all money is created equal
It is important to remember that not all money is the same. When you are looking for money for your business, think about these things:
- Debt vs. equity. The money you receive could be either debt or equity. Debt is usually from banks or businesses and equity is usually from investors. Equity means the investor gets a percentage of future profits. Even though it looks free, this is the most expensive kind of money if your business does well.
- Control. When you get money from investors or partners, you will not have as much control as before. A lender may also want to check your finances and do audits. Be aware of what things you are giving away when getting money.
- Security. How is the lender getting their money back? Are you vouching for it? Will they put a lien on your things if you don’t pay them back? If you can’t pay, who will they ask for the money?
- Transferability. When you sell a business, can the money move to the new owner? Is the money for you or for the business? It’s not good if all the funds stay with you.
- Ease of attainment. How easy is it to get the money you need? You may need to spend some time on it. Are you adding people to your team who want your success? Pierre Omidyar looked for VC money for eBay not because he had to, but because he wanted help building a great team. Sometimes bringing on investors and sharing control can help you succeed.
Establish a strong base for your business
To get money for your business, you need to make it look like a real company. This means separating your personal and business activities. To do this, you need to become an S or C Corporation or an LLC. If you don’t do this, people won’t take you seriously and the only way to get money is through personal loans. Investors can’t invest in a sole proprietorship: You need to have shares or membership units if they’re going to give money. Not incorporating makes it harder for your business to get investors and money.
Your business needs its own credit profile. This is different from your personal credit. To get money for your business, you have to follow certain rules. These rules are made by people who lend money to businesses. If you do not follow these rules, you won’t be able to get loans or other kinds of money. So it’s important that you build business credit for your company.
The four tiers of financing
Small business owners can get money to help them in four different ways. It is good to know about each way and use the best one for your business. Here is a quick overview of each:
- Tier 1: Basic trade credit. Business or trade credit is one of the biggest ways to get money. You don’t need to check credit or sign a promise saying you will pay it back. Tier 1 trade credit is the simplest kind and can help you if your business is ready for it. But it can be dangerous if your business isn’t ready. If you are prepared, this form of capital can help a lot.
- Tier 2: Advanced trade credit. Tier 2 is money businesses give to other businesses. They check the business’ credit first before giving out the money. Tier 2 usually includes bigger amounts of money, long time periods to pay it back, and can be used for things like buying equipment from other companies. If you need something from another company, you can use Tier 1 or Tier 2 to help buy it.
- Tier 3: Bank lending. Bank financing is a popular way to get money for your business. The bank will check both your personal and business credit, and you might need to promise that you will pay the money back. For bigger loans, you must have a good plan for how to use the money and show that you can pay it back. Banks and credit card companies are two types of lenders who give this type of loan.
- Tier 4: Investors. Tier 4 is when you look for people to give money who are not banks or companies. These people are called venture capitalists and angel investors. They want to help businesses that have been around for a couple of years, can show their financials and explain how the business will grow.