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22 BUSINESS FUNDING OPTIONS 16 work for New or Startup Businesses!

Plus One Bonus B2C Idea Hello, my name is Gary Luedtke. Like you, I have been a small business owner for 33 years. For the first 31 years I ran a successful contracting business, so I know what it's like to walk the high wire without a net. Interested in business financing, I learned all I could and I now help businesses like yours get the funding they need to survive and prosper. This eBook presents the pros and cons of 22 business funding options in a simple to understand manner so the best course of action can be decided on quickly and confidently.

DID YOU KNOW?

Most banks only offer about 40% of the business funding options available and most business owners are unaware of the remaining 60%.

80% of all US business bank loan applications get turned down. 50% of all new businesses fail within 5 years, lack of funding being a big reason.

After reading just a few short pages, you will know the pros, the cons and the risks associated with each funding option so you can make intelligent and informed decisions to grow your business.

Let's get started. For ease of understanding, the funding options have been arranged into four categories.

Table of Contents ***Red text indicates a new or startup business funding option***

EQUITY FUNDING: You give up equity in exchange for funding

Venture Capital: Private Equity:

Angle Investors: Crowdfunding: Friends and Family: (Could actually be in almost any category)

DEBT FUNDING: You take on debt in exchange for funding

Unsecured Business Line of credit: (UBL) o Credit Cards: o Trade or Vendor Lines of Credit: o Unsecured Bank Draft (UBD):

Commercial Bank, Conventional, SBA, FHA & HUD Loans: Commercial Mortgage Backed Securities (CMBS) or “Conduit Loans:” Peer to Peer Loan (P2P): Home Equity Line of Credit (HELoc): Bridge Lending: Mezzanine Financing: Import / Export Loans:

ASSET BASED FUNDING: Funding secured by an asset. IE: inventory, accounts receivable, machinery and equipment...

Equipment Financing: Factoring: PO Financing: Merchant Cash Advance: (MCA)

DEBT FREE FUNDING: Funding without taking on debt

Retirement Fund Borrowing or Rollovers as Business Startups: (ROB's) Monetizing Fixed Payouts: Luxury Asset Loans:

BONUS B2C IDEA: If you offer consumer financing, instantly boost your gross revenue by capturing on average 30% of your lost sales.

Business to Consumer Financing:

EQUITY FUNDING You give up equity and possibly control of your business in exchange for

funding. Giving up equity is the most expensive form of funding.

Venture Capital: (VC)

Venture capital firms provide funding in exchange for equity and usually controlling interest in your company. In recent years, venture capital companies have favored biotechnology, IT, software and entertainment businesses that are unique and have high earnings potential. Unfortunately less than 1% of all venture capital applications ever receive funding. Besides being hard to get, venture capital is the most expensive and time consuming form of funding there is. Net cost can be as high as 70%, not to mention you could lose control of your own company, including being voted out. Ouch! All the same, venture capital works well for some.

PRO's

Low Personal risk.

CON’s

Typically no startups or "pre-revenue" businesses. Giving up equity, the most expensive form of funding. Net costs as high as 70%. May have to give up controlling interest in your company. Hard to obtain, lots of time and effort required. Share your profits with the Venture Capital firm.

Private Equity:

Most private equity firms look for privately held companies that are under performing. Their plan is to buy cheap, turn things around and sell for a profit. Typically they’re looking to buy a business, not fund it. So, if you have a large business that is under performing and you want out, this may be for you.

PRO's

Low or No Personal risk. (this is mainly an exit strategy) If you want to sell, this may be an option.

CON's

Private equity firms are bargain basement shoppers, so the price you get will probably not be what you would like.

Angle Investors:

Angel investors are the most realistic equity funding option for smaller businesses. Like the name implies, you are looking for an investor with deep pockets that believes enough in you and your business to provide the needed funding. Typically they want some form of equity, a voting seat on the board and a say in major decisions. Some angel investors may even agree to a convertible note that converts to equity ownership at a future time at a discounted price. Like venture capital, seeking angel investor funding takes time and effort, but it is usually easier to obtain and less expensive.

PRO's

MIGHT be a funding option for "Startup" or "Pre-revenue" businesses. Low Personal risk. Best of the "equity" funding options. Typically more flexible terms than venture capital funding. Typically easier to obtain than venture capital funding. Typically less "equity" and control is given up compared to venture capital

funding.

CON's

While less, you're still giving up equity, the most expensive form of funding.

"Angle Investors" almost always require an equity stake in your company and... possibly a say in major decisions.

Considerable time and effort is required to find the right "Angle Investor"

Share your profits with the angle investor.

Crowdfunding: Depending upon the crowdfunding site, it can be "Equity", "Debt" or "Debt Free" funding

You could liken crowdfunding sites to a dating site in that they match borrowers with lenders and each site achieves that differently. Some provide "project" only funding while others gladly fund startups and pre-revenue businesses. Some allow you to specify whether you want "Equity" or "Debt" funding while offers offer a hybrid "Debt Free" funding where borrowers are expected to reward funders with discounted or free merchandise. The industry is new and it doesn't work for everyone, but serious money can be raised so it may be an option worth exploring.

PRO's

Depending upon the site, this can be used to fund startup and pre-revenue businesses.

Level of risk depends on the terms, IE: "Equity", "Debt" or "Debt Free" funding.

CON's

Rates and terms vary significantly depending on the site and the lender(s) you choose.

Need to locate the best crowdfunding site for your needs.

Friends and Family:

For many of us, family and friends are the first thought we have when we need money. What is the relationship with your friends and family worth to you? If your business fails and you lose their money, relationships will surely change and possibly end. If your business becomes successful, relationships may still change and possibly end. Are you ok with whatever happens? If so, be certain everyone is on the same page and get things in writing.

PRO's

Can be used to fund startup businesses.

CON's

There are far too many variables for anyone to comment whether or not this is an acceptable funding option for you.

DEBT FUNDING You take on debt in exchange for funding.

Unsecured Business Line of credit (UBL) three types...

1) Credit Cards:

According to the National Federation of Independent Businesses (NFIB), 79% of all small business owners use credit cards as a "vital part" of their business. When structured and used properly, they are an excellent funding tool. Problem is, credit card funding often ends up damaging an owners personal credit. Why? Because 95% of the time, the cards they use report to their personal not their business credit profile. Here's what happens...

Say you have $10,000 in personal revolving credit with $2,000 of it in use, your utilization rate would be 20%. You get a new card for your business with a $10,000 limit and put $8,000 of expenses on it. Even though your new card is in your business name, there is a 95% chance it still reports to your personal credit profile. If it does, you have just spiked your personal utilization rate to 50% causing your credit score to go down. Lenders do not line seeing utilization above 20%.

With “damaged” credit, future funding may get turned down or lenders will offer less funds at a higher rate.

Once that begins happening, your profits and your competitive edge will slip, a downward spiral usually follows... from which many business never recover. Call it bad management, call it lack of funds, call it whatever you want…. but this scenario is a big reason why many small businesses fail.

NOW... if your new card had reported to your “business” credit profile, your personal utilization would still be at 20%, your credit score would never have taken a hit and you would have no problem getting additional funding.

Personal credit is what lenders primarily focus on when underwriting small business loans, so it's an asset you should protect. If credit card funding is of interest to you, work with someone that can and will structure a program that preserves and protects your personal credit.

PRO's

Great for Startup businesses. Low Personal risk. (Unsecured) Better rates and payment terms than most conventional loans

when managed properly. (often 0% for 6 - 12 months) No upfront fees, business plan or financial documents required. Flexible monthly payments. Credit limits can grow organically.

Additional tax benefits if card reports to your business credit profile.

CON's

Will damage your personal credit if cards used for business report to your personal credit profile.

High rates if not structured and managed properly.

2) Trade or Vendor Lines of Credit:

Trade or vendor lines of credit are lines of credit extended to you by vendors you do business with. Usually a 30 day net account requires no collateral or personal guarantee. This is better than cash and is a great way to build business credit. Every business owner should take advantage of it whenever possible.

PRO's

Great for startup businesses Low Personal risk. (Unsecured and usually not personally

guaranteed) Great way to build business credit. Easy to get.

CON's

Credit limits are usually minimal. Will damage both your business and personal credit if you

default. Typically 30 days net.

3) Unsecured Bank Draft (UBD):

UBD's are unsecured bank issued lines of credit for businesses that need ongoing funding. They offer the best rates and terms of any line of credit. To get one, you'll need excellent personal and business credit, complete financial documents, a minimum of two years in business and around $250,000 in gross annual revenue (of which 10% is the most you can hope to get approved for).

The rates and terms of a UBD are why everyone wants one, but only 13% of all UBD applications ever get approved. It's the "unsecured" aspect that makes UBD's almost impossible to obtain. After the 2008 meltdown, most banks discontinued offering them and "termed out" existing UBD's. (Termed out means they converted the existing UBD balance into a conventional term loan and closed the line of credit) Cutting business lines of credit put many businesses out of business.

PRO's

Low Personal risk. (Unsecured) Best rates of any unsecured funding. Low monthly payments.

CON's

Will damage both your business and personal credit if you default.

2+ years in business & $250,000 gross annual revenue Very tough to find and even tougher to get! Only 13% of applications get approved. Full financial documents and business plan required. Must have impeccable credit. Maximum line of credit you can get is usually 10% of your

businesses gross annual income.

Commercial Bank, Conventional, SBA, FHA & HUD Loans:

In general, banks offer the best rates and terms when it comes to business funding options, but qualifying for them can be difficult. SBA 7a loans are popular because they offer great rates and terms, (5, 10, 15 & 25 yrs.) are easier to qualify for and can be used for many purposes including business acquisition. Depending upon the deal and the lender, approval times range from a few hours to 1 year and fees are often rolled into the loan. Usually fixed assets, (including your home) are be required as collateral. It’s rare, but there are a few SBA lenders that will do unsecured 7a loans.

PRO's

Low personal risk. (if unsecured) Best rates and terms. SBA 7a loans are usually easier to qualify for and offer the quickest

approval and funding times. SBA 7a loans can be used for business acquisitions. It’s rare, but there are SBA lenders that will do unsecured 7a loans. Fees are often rolled into the loan.

CON's

High Personal Risk. (if secured with business and personal assets) Usually 2+ years in business required for operating expense and

expansion loans, zero years for business acquisitions. Can be difficult to qualify for, it depends on the lender and the

deal. A few hours to 1 year approval times, depends on the lender and

the deal. Depending on the lender and the deal, documentation

requirements can be minimal to extensive.

Commercial Mortgage Backed Securities (CMBS) or “Conduit Loans:”

CMBS loans are usually non-recourse 5, 7, 10, 25 or 30 year fixed rate, balloon payment, first-position commercial mortgage loans. They are primarily for apartments, offices, self-storage units, hotels, industrial sites, warehouses and retail locations. Typically they offer higher leverage and slightly lower rates than banks and often interest only payment options, which enables some investors that do not meet conventional loan requirements an opportunity to invest in commercial real estate. Typically these are larger loans (2M+) with substantial up-front commitment fees and hefty prepayment penalties, but the vast majority are assumable for a fee. Beware of rock bottom rates offered by smaller CMBS lenders, they have a higher risk of not closing, and not closing could be far more costly than any expected rate savings.

PRO's

Low personal risk (non-recourse) 5, 7, 10, 25 or 30 year fixed rate. High leverage, low interest and sometimes interest only payment options. May enable investors that do not meet conventional loan requirements

and opportunity to invest in commercial real estate. Usually assumable for a fee.

CON's

Usually a balloon payment at the end of the term. Typically these are larger loans (2M+) Substantial up-front commitment fees. Hefty prepayment penalties. Rock bottom rates offered by smaller CMBS lenders have a higher

risk of not closing, and not closing could be far more costly than any expected rate savings.

Peer to Peer Loan: (P2P)

Peer-to peer lending is unsecured business funding through P2P websites. Basically you post your business story on-line in hopes that individuals will put up small amounts of money, (usually $50 each). $35,000 is about the maximum you can hope to raise and the interest rate will be determined by your credit rating and what the crowd will accept.

The reality is... only 15% of all P2P web site loan applications get approved, and most that are approved never attract enough lenders to raise the money they need. But keep in mind, if you do get approved and you are able to raise funds, make your payments on time! Late payments will be promptly reported to your personal credit profile and collection agencies will be after you if you default.

PRO's

Can be used to fund startup businesses. Low Personal risk. (Unsecured) Relatively simple application process.

CON's

P2P websites review and approve only 15% of all applications, so your chances of getting funding are not much better than a bank.

If approved, most P2P sites fail to generate enough interest to raise the funds needed.

Will damage your personal credit if you default.

Home Equity Line of Credit: (HELoc)

Their rates and terms are good, but home equity loans are hard to come by these days and they are not the best business funding option as they carry a high risk. If your business runs into trouble and you can't make your payments, you could lose your home!

PRO's

Can be used to fund startup businesses. Great rates.

CON's

High Personal risk (Secured by your home) You could lose your home.

Usually upfront fees and closing costs. Since 2008 they are tough to find and harder to get.

Bridge Lending: AKA: "Gap Financing", "Interim Financing" or "Swing Loan"

Bridge Lending is quick, customizable, short term collateralized funding used until permanent financing can be secured. In real estate, it enables fast accusation or it can be used to cover the shortfall that happens when buying property B before property A has been sold. It could even be used to secure needed working capital until other funding becomes available.

Typically these are higher rate, 12 month loans used to fill a temporary time gap in funds.

PRO's

Great for some startup businesses, especially real estate. Your risk is limited to your collateral. Quick, customizable, short term collateralized funding.

CON's

Higher rates. Will damage your business and personal credit if you default.

Mezzanine Financing: (Hybrid Debt and Equity funding)

Mezzanine financing is a 3-5 yr. term loan that is typically used to quickly generate capital. Often businesses use this to expand or fund a partner or leveraged buyout without issuing shares, voting rights or collateral.

Unlike normal loans, mezzanine loans are treated as equity on the balance sheet which may make it easier to obtain standard bank financing later. Typically these deals carry high interest rates, (20% to 30%) because funding is usually provided very quickly with minimal due diligence by the lender.

The loan is secured by "warrants" or "options" (subordinate to senior lenders) that gives the financer the right to convert any balance due into an ownership or equity interest which can then be sold or transferred at their discretion if the loan is not repaid as agreed.

PRO's

Quick funding without issuing shares, ownership interest, voting rights or collateral.

Great for expansion capital, funding a partner or leveraged buyout. It's a loan that is treated as EQUITY on the balance sheet.

CON's

If you do not repay the loan, you risk the financer exercising the "warrants" or "options" and converting any outstanding balance into ownership shares, which can then be sold or transferred at their discretion.

Expensive (20% to 30% range) 3-5 yr. term loan. A proven track record of performance is required. $10,000,000 minimum annual gross revenue. Will damage your business credit if you default.

Import / Export Loans:

If you need capital to expand into foreign markets, there are specialized import/export loans. Most of these are backed by the Export-Import Bank of the United States. The U.S. Dept. of Commerce, arranges introductions with possible buyers and organizes trade missions abroad. The National Export Initiative earmarks funds for helping startups and small companies interested in selling overseas.

ASSET BASED FUNDING Funding secured by an asset.

(IE: inventory, accounts receivable, machinery and equipment) Equipment Financing:

You have two options when it comes to financing new equipment, purchase or lease.

Purchasing equipment requires a down payment which depletes your cash and means you've taken on long-term debt that will show up on your business and personal credit. Purchasing offers depreciation benefits but minimal tax benefits. Repairs are typically on you and in the end you usually end up with something that has very little value. Purchase rates vary greatly, so shop around.

Equipment leasing rates are a little higher than purchase rates, but leasing usually does not require a down payment so you preserver your cash. If structured properly, a lease will not show up on your personal credit or as a long term business debt. Typically you’re not responsible for repairs when leasing, tax benefits are usually better but when the lease expires, the equipment is either returned or purchased.

Which is best? Generally leasing, but every situation is unique, so consult your accountant.

PRO's

Startup businesses usually qualify. No long term debt if leasing. Your risk is limited to the equipment Leasing preserves your capital.

CON's

Will damage your personal and business credit if you default on a purchase or a lease.

When a lease expires, the equipment is either returned or purchased.

If purchasing, you take on long term debt and usually end up with something of little value in the end.

Purchasing ties up capital. Leasing rates are higher than purchase rates.

Factoring

Factoring or "Accounts Receivable Financing" dates back to biblical times. It's an excellent option for solving cash flow problems because it enables a business to convert their accounts receivable into cash without taking on debt or risk. Factoring is NOT a loan, so

your company’s credit is of little concern. It is the selling of your accounts receivable to a factor at a "discount" in exchange for cash. Here’s how it works:

The Problem: Your business is growing and you’re sitting on a lot of unpaid invoices which has put you in a cash flow crunch. Suddenly you don’t have enough money to pay your expenses let alone fill incoming orders. You need money NOW to keep growing or you may lose your customers and threaten the very existence of your business.

The Solution: Sell your invoices to a factoring company at a discount. IE: You sell $100,000 in invoices to a factor, within days you receive $90,000. When the factor receives payment for those invoices from your customer, you will be paid the $10,000 balance minus the factors discount. If the "discount" is 3%, the factor will keep $3,000 as their fee and you get the remaining $7,000. In concept, this is very similar to the "2% net 30” payment terms businesses offer their customers to encourage early payment, or to a salesman discounting a deal a few points to make the sale.

There are two types of factoring - Recourse and Non-Recourse:

A recourse factor has the legal right to demand payment from you for any unpaid invoices, a non-recourse factor does not. For obvious reasons I recommend using a non-recourse factor whenever possible, especially since the discount rate between the two is minimal. Consider non-recourse factoring as cheap credit insurance on your receivables.

Factors regularly examine the credit of the company being invoiced before purchasing invoices from you. If there is a concern, you will be informed. That means you essentially have a free “in house credit team”, so you'll always know ahead of time whether or not your customers can pay for the goods or services you provide.

Most publicly traded companies understand the benefits of factoring and utilize it whenever needed. For reasons unclear, factoring has gone pretty much unnoticed and misunderstood in the privately owned business world. If you are a growing B2B company and you’re wrestling with cash flow issues, consider factoring.

PRO's

Great for new or established B2B companies. No risk if using non-recourse factoring. (non-recourse means the factor

cannot demand repayment for advanced funds if your customer does not pay)

Moderate risk if using recourse factoring. (recourse means the factor can demand repayment for advanced funds if your customer does not pay)

Instantly solves cash flow problems. Your personal and business credit is of little concern. Not a loan, so it does not show as a debt on the company books. You have the benefit of a free in house credit team, so you'll always know

ahead of time whether or not your customers can pay for the goods or services you provide.

CON's

Your customer must have strong business credit. No Business to Consumer type companies.

PO Financing:

PO Financing is short term funding that provides 100% of the money needed to purchase supplies and manufacture the goods sold so orders can be filled. A PO financer considers your income statement, balance sheet and your ability to perform along with the credit worthiness of your customer. Startup's or cash strapped companies that show a minimum 20% gross profit margin (GPM) can use PO Financing to fulfill orders timely and grow unencumbered. Minimum transaction size is $300,000, underwriting in 7 - 10 days.

PRO's

Great for new or established B2B companies. Unless you defraud the PO financer, Personal risk is low. Enables you to take on large orders you normally could not. Enables your business to grow unencumbered. Fast underwriting.

CON's

Both your business and your customer need to have good credit. Your business needs to show the ability to perform. Minimum transaction size is $300,000.

Merchant Cash Advance: (MCA)

MCA is a short term "advance" on 1 - 3 times your monthly credit card sales history. Unlike a loan, there are no fixed payments or set payment dates, the lender collects a percentage of your daily credit card sales through your credit card processor or via ACH until the advance has been repaid. (usually 6 to 18 mo. max term)

The cost of the MCA is based on a factoring rate, not an interest rate. IE: A common MCA factoring rate is 1.3, meaning $1.30 will be paid back for every dollar advanced. Business owners with damaged credit can still qualify for MCA funding. Typically restaurants or other retail businesses that accept credit cards benefit from MCA funding. In recent years, similar but less expensive funding options have become available.

MCA funding is considered expensive, but they require a minimal operating history and the lowest credit requirements of nearly any funding option.

PRO's

Unless you defraud an MCA funder, this is considered low risk because in most cases it is non-recourse, (non-recourse means if your business fails, you're not on the hook to repay the advance)

Minimal operating history required and low credit requirements. Cash flow friendly repayment terms, you pay a percentage of your daily

gross revenue instead of a fixed amount monthly. Great for business owners with damaged credit. Easy to qualify for. Best for retail businesses that accept credit cards. 5 day funding.

CON's

Expensive. (similar but less expensive funding options are available)

DEBT FREE FUNDING Funding without taking on debt

Retirement Fund Borrowing or Rollovers as Business Startups: (ROBS)

This is a debt free funding option where you move your retirement funds into a new corporate 401K then borrow that money (tax free) to buy, re-capitalize a business or fund a startup. You can't beat the terms but there are upfront and monthly fees and you'll need a minimum of $35,000 in your 401K to make it worthwhile. They are popular with franchisees, but with your retirement funds on the line, this is considered a high risk funding option.

PRO's

Can be used to buy, re-capitalize or fund a startup business. A debt free funding option. Popular with franchisees. Favorable terms. Nearly anyone with a retirement fund can set one up. No business plan or financial documents required. No credit or income checks.

CON's

High Personal risk (You could lose your retirement fund) Upfront and monthly management fees. Must create a separate "C" corporation. Minimum $35,000 in your 401K.

Monetizing Fixed Payouts:

If you currently receive regular payouts for an annuity, lottery winnings, cell tower lease, company separation agreement, business term pay out… You can monetize those payments into one lump sum and use the funds as you see fit.

PRO's

Great for ANY funding need, business or otherwise. No Personal or business risk. (your selling future income at a discount on

a non-recourse basis) A debt free funding option. No credit or income checks. No information gets reported to credit agencies.

CON's

You give up a percentage of future income.

Luxury Asset Loans:

If you have luxury assets IE: watches, jewelry, wine collection, cars, fine art, gold and precious metals... You can use them to secure a loan and get your assets back once the loan is repaid.

PRO's

Can be used to buy, re-capitalize or fund a startup business. A debt free funding option. No credit or income checks. No information gets reported to credit agencies. Fast valuation. 24 hr. funding.

CON's

You risk losing your asset if you do not repay the loan.

BONUS B2C IDEA Consumer financing for Business-to-Consumer companies

If you're a $500,000+ per year "Business to Consumer" company that offers consumer financing, we have a program that will instantly boost your gross revenue by capturing on average 30% of your lost finance deals! Funding in 3 – 5 days, 6 – 48 month terms including a 6 month same as cash option. Monroe and Midas Muffler use this program to capture $40,000,000 annually in lost finance deals! It's easy to set up, simple to use and works with almost any product or service priced between $500 and 9,000 (except auto sales). Here are some examples...

Education: Any form of education… seminars of all sorts, language courses, traditional trade schools, private schools...

Medical: Any elective… Lasik surgery, orthodontics, weight loss procedures, dental, cosmetic dentistry, fertility, veterinary, enrichment, CT scans... We can even set up consumer financing and debt servicing for hospitals or clinics.

Memberships: Any type of membership…. vacation clubs, dating services, karate, monitoring services...

Consumer Goods: Home improvements… walk in tubs, TV’s, hot tubs, above ground pools, energy efficiency products, battery powered motorcycle, home assessment services, guns, wheels & tires, ATV's, auto repair...

What would recovering 30% of your lost financed deals do for your bottom line?

PRO's

Great for new or established B2C businesses. Instantly increase your financed deals gross revenue by an average of

30%! ZERO risk, everyone wins. Any $500,000+ per year B2C company that offers consumer financing (or

would like too) for any product or service except auto sales. Average sale should be between $500 and $9,000. Used by Monroe and Midas Muffler to capture $40,000,000 annually in

lost finance deals. Easy to set up. Funding in 3 – 5 days. 6 – 48 month terms. 6 month same as cash option.

CON's

No auto sales financing.