January 21, 2011
Startup businesses need cash to operate. At the very least, an entrepreneur needs sufficient cash to pay bills, and buy some equipment or server space while things get up and running. For entrepreneurs, available capital, aka money, can be broken into two broad categories: Your money and other people’s money. In today's post, we'll explore some of the options you have with your money. Tomorrow we'll look at other people's money.
The simplest way to get cash to your business is to use your own money. You can do this in several ways:
Bootstrapping, or running a company on the revenues generated, is by far the best way to get cash into your business. However, most emerging technology companies require some amount of investment before they can begin to generate revenue. Consider if your company can survive on some type of consulting revenues until your product can be launched or monetized.
Owner’s Capital Investment is typically money invested at the start of the business and is a nominal amount. But, if you have cash you’d like to put in the business, most business structures allow for additional owners capital to be invested later in the business cycle.
Loan from Owner – If you have some extra cash and your business needs it, consider giving your business a loan. Typically, you can loan your business up to $10,000 without documentation, as long as you charge interest at least equal to the IRS “applicable federal rate”. Larger loan amounts require documentation.
Cash draws from credit cards / days-same-as-cash promotions – I put this method in the “your money” category because the solicitation generally comes to the owner personally and no business documentation is required. Use these options carefully and read all terms. For days-same-as-cash deals promotions, it’s reported that 90% of people DO NOT pay the balance off in the promotional time frame and end up paying the retroactive interest. If you have the discipline and plan and follow a pay down schedule, these can work for you. If not, don’t do it.
Credit Cards are one of the least desirable and most expensive ways to finance business expenses. Use with extreme caution. Also, if you take a cash draw from a credit card, DO NOT also use it as a credit card. Most fine print will note that payments will be applied to the open balance that has the lowest interest rate. Typically, the cash draw will have a lower interest rate than the credit card purchases, and the credit card company will apply your payments to the cash draw balance first. The high fees on your credit card charges will start to rack up.
This is a guest post by Michelle Hoffman of Hoffman CFO Consulting. HCFO helps lots of young companies understand their finances and put solid internal practices in place. You can reach her on Twitter @hoffmancfo. Join their free webinar, sponsored by Women in Public Policy (WIPP) Understanding Your Funding Sources, Tuesday, January 25th, 1-2pm ET / 10-11am PT – register here by January 24.
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