Finding funding for a small business can be daunting. A Google search for “small business loan” brings up 180 million results! In part, this is because the last few years have seen a surge in business financing options. Nonetheless, some approaches stand the test of time.
Here are 3 lessons you can learn from how world famous entrepreneurs funded their businesses.
1. Use Personal Assets to Get Startup Capital.
Back when Apple was an itty bitty startup in the late 1970s, Steve Jobs and his business partner Steve Wozniak sold their personal belongings to get cash for the business.
Jobs sold his Volkswagen minibus, and Wozniak sold his Hewlett-Packard 65 calculator. That gave them $1,350, which they used to set up shop in Jobs’ parents’ garage and begin working on the first Apple computer, Apple I. Although Apple I didn’t become a hit, it generated enough sales to enable the pair to design Apple II, the first personal computer with color graphics and a keyboard. Sales of Apple II topped $3 million in its first year. The rest, as they say, is history!
All of this happened in 1976, but business owners today can also get a nice chunk of business capital by leveraging personal assets. The $1,350 saved by Jobs and Wozniak is equal to $5,662 today. Do you have a car that you can trade in for money? Stocks you can sell? Thinking more largely, do you have home equity or retirement funds that you can funnel into your business? While that’s not quite the same as selling a personal belonging, you are leveraging some of your most valuable personal assets (your home and retirement account) for your business. In fact, about ¼ of American small business owners get a home equity loan or line of credit to finance a business.
2. Try Credit Cards or Purchase Order Financing.
Let’s stick with Apple for a bit. Paul Terrell, the owner of Byte Shop in Mountain View, CA (one of the first ever retail computer shops), placed the very first order for Apple computers in April 1976. He ordered 50 Apple I computers at $666 a piece payable on delivery. Jobs and Wozniak promised to deliver them in 30 days, but they didn’t have the money for the components needed to make the computers. The pair was turned down for a bank loan because, at the time, the company didn’t have a cent to its name.
Jobs didn’t let that hold him back. He got a purchase order from Terrell for the 50 computers and took it to a local components shop called Kramer Electronics. He asked Kramer Electronics’ accountant to call Terrell, who verified the order. Kramer Electronics then agreed to loan Jobs $15,000 worth of parts on 30 days’ credit. Years later, Terrell said, “I don’t think Steve ever got enough credit for how clever he was with this transaction.” The Apple I was delivered to Terrell on time. After Terrell paid Jobs and Jobs paid Kramer Electronics, Apple was left with $18,000–its first profits.
The 30 day term that Jobs negotiated is equivalent to using a credit card. Credit cards, which are surprisingly cheaper than other types of business financing, are a quick and convenient source of business capital. Nowadays, you can even earn rewards points for charging expenses to a credit card. If you can’t qualify for a good business or personal credit card (e.g. due to poor credit), many retail shops offer their own credit cards with less stringent qualification requirements. For example, Home Depot, Walmart, Amazon, and gas stations offer credit cards for those with average or below average credit.
If your business sells tangible goods, you can also consider purchase order financing. Purchase order lenders will pay a supplier on your behalf to manufacture and deliver goods to your customers. Upon receiving the goods, the customer will pay the purchase order lender directly. The lender will then deduct its fees and pay the remaining balance to you. Think baby steps. To start out, you may not qualify for financing for a huge $100,000 order, but you may be able to fulfill a smaller $10,000 order and work your way up.
3. Adapt Your Business Model to Increase Cash Flow.
If you’re having difficulty raising money for a new business, you might want to ask yourself this in the early stages: are there changes I can make to reduce my dependency on financing?
Some famous business owners mastered the art of maximizing their business’ cash flow. Michael Dell started Dell computers in his University of Texas dorm room in 1983. Many people don’t know that Dell asked his small business customers to pay in advance. This allowed him to hire employees and buy necessary components. Similarly, Bill Gates and Paul Allen of Microsoft asked hardware companies to pay them in advance when they were hired to write operating software.
Many small businesses run into cash flow problems by extending payment terms to their customers. They end up having to wait several weeks to be paid for goods and services. While they’re waiting, they have to put hiring and growth on hold. By asking for payment upfront, you can help your business grow more quickly. Can you really afford to demand payment in advance, though? The answer is yes if your product or service is an essential and if you don’t have strong competitors. Gates and Allen could demand advance payment because computers are useless without software that tells the computers what programs to run. If you’re in a more competitive space, you can use an invoice financing company to get capital while waiting for customers to pay you.
We hope these success stories inspire you to get creative in your search for business financing. In 2015, there are more options than ever before for business financing, but sometimes the tried and true methods work best! If you need help, feel free to contact FitBizLoans!