Most entrepreneurs that plan to launch a business start out with a value proposition that they want to develop. The funding to get started often comes from the pockets of those involved.
Sometimes, however, despite the best efforts of the owners, the business fails to live up to expectations, creating a debt for someone to pay off. Because of that potential risk, during the last economic downturn, it became popular for entrepreneurs to look for ways to fund their business that did not involve incurring debt.
As the economy improved, the trend towards funding without going into debt continued to be strong. Here are some tips and tricks for starting a debt-free business:
Take advantage of crowdfunding: If you have a concept or product idea that you have developed to the point where all that you need is the money to produce it, you can find friends in the crowdfunding industry. By going online and starting a campaign and building it by letting everyone around you know, you can often obtain the financing that you need to purchase equipment and produce your product for a large group of customers. The nice thing about crowdfunding is that you are not incurring debt to expand. You can also use now use crowdfunding to create equity for your firm, but there are some reporting requirements that can cost extra money to implement.
Consider licensing: Selling your technology as a license is similar to crowdfunding, but there are no reporting regulations that cost money to generate. Instead a license sale is a straight sale that can stipulate that investors receive x-type of benefit for licensing your technology. At venues like Imaginot.com, those creating a licensing sale typically pay back the licensing fee over time, creating more benefit for the purchaser.
The idea behind having the purchaser receive different ongoing benefits is that the overall return is typically higher if the company manages to break even or turn a profit.
SBA style works too: Going after grants and government funding is one of the more common ways that the Small Business Administration tries to get companies engaged when it comes to financing your company without debt. You will want to have a good credit history and some patience when you take this approach because there can be a lot of paperwork to fill out and file in order to be considered for various opportunities. “Most companies that are committed to funding using government opportunities and support start early and use other forms of funding while they are waiting for the government opportunities to be decided upon,” said New Business Survival.
Get a line of credit: If you are trying to remain debt-free, getting a line of credit can be a double-edged sword. You will be able to cover extraordinary events like expansion or emergency situations with a line of credit. At the same time, if you are not careful, you will end up with chronic debt that costs money to finance. So while it is important to gain access to some form of line of credit to keep your business viable in terms of growth, it is a good idea to set limits on when money can be pulled from the line of credit. Oftentimes, companies can set a requirement that the money from invoices that is to be paid be already booked as a sale before management is allowed to access the line of credit. By doing that, it is possible to run an internal cash for receivables program that keeps your company fiscally strong.
Of course, if you need to go outside to companies that do finance receivables, you will also have a track record of already working with them.
Overall, starting your business debt-free is a pretty good goal because it makes you finance-friendly when you start to grow. The community will respect your stance- and you will likely remain in business longer than you would if you opted to debt-finance most of your capital needs.