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Inventor Financing Part 2
Raising Big Money
These are people who are looking to put serious money into a new product or business that has the potential to give them a good return. They may put anywhere from $50,000 to $1,000,000 into a project. Expect them to be very careful about where they put their money and check and double check everything about your product and business. Also expect them to try to negotiate a deal that is good for them. You can find these investors through other start-up companies, at entrepreneur clubs or venture conferences.
These are firms that invest in companies with high-growth potential, experienced management and a sound business plan. Often they are unwilling to invest in a company without a sales history, unless it is involved in an exciting new technology, and they are not looking to make small investments–usually they invest $1,000,000 or more. To find these firms, look for Pratt’s Guide to Venture Capital Sources, which is a fairly comprehensive list of venture capital companies, at a larger public library.
Private placements mean raising money by hiring a broker to sell stock, but not making the stock publicly available like on a stock exchange. The stock is sold mostly to accredited investors, who make more than $200,000 a year (or $300,000 together with spouse, if married) or who have a net worth of more than $1 million. This stock can be hard to sell and investors generally hope that you eventually go public with your company so they can sell their stock on an exchange. Broker and legal fees for this can be considerable, for instance raising a $1 million or more can easily cost you $250,000.
Initial Public Offerings (IPOs) are much like private placements, except that your stock can be freely traded on stock exchanges. The timing of your IPO is important for investors because it offers them the first time they can sell their stock and usually they want you to go public when the company is doing well and is going public to raise money for a major expansion. Before an IPO, you can only sell stock to people you know, or people someone in your company knows, and to accredited investors, so an IPO opens you up to many more investors and gives you the potential to raise serious money. But the legal fees to offer an IPO are also very expensive, typically well over $250,000.
If you don’t have the money to set up a private placement or an IPO, you can still sell stock publicly through the Small Corporation Offering Registration (SCOR) program. Through this program you can raise up to $1 million for a much lower cost because of the reduced paperwork.
There is a huge amount of funding available for you depending on what area you live in and what your ethnicity or religion is. Many cities and counties, especially in rural areas, but also sometimes in the inner-city, have economic initiatives to bring business and jobs to their area. These funds can be low- or no-interest loans, tax breaks or even grants. Sometimes even if you are not located in an area that offers these funds, you can still access these funds if your manufacturer is located there.
If you are part of a minority, either religious or ethnic, there are also funds available. These funds are usually not available through the government, but often successful members of the minority set up funds to help others in their minority also succeed. A simple internet search may help you find some of these funds, or you can also contact minority media outlets, like newspapers or websites, and they probably know who offers such funds.
Real estate investors and equipment leasing companies are often willing to buy your building or manufacturing assets and lease them back to you.
Factoring (also called receivables financing) companies buy your account receivables from you for 4% to 8% off the face value. They then receive payment as the client or customer pays. This can be very expensive since you are giving up to 8% of the bill to get the money two or three months in advance.
Instead of just offering 30 day terms, you can require down payments, especially on custom made orders. These deposits will help your cash flow and pay for the products your are producing to sell.
Banks always want collateral for their loans, and if don’t have business collateral, they will want personal collateral. Some of the most common bank loans are:
- installment loans, where you make a monthly payment for a certain number of years
- term loans, where you repay the entire amount after a certain number of months or years
- asset based loans, for inventory or equipment
- revolving line of credit, which you can withdraw when you need cash and repay when you have extra cash
Small Business Administration loans are similar to bank loans, except the borrower doesn’t need to offer collateral because the government guarantees the loan. These loans can also be easier to get than bank loans.
Borrowing Money Off Orders
With a big order from a reputable company, you can often secure a term loan from a bank. Private investors also can offer you a short-term loan, but they will charge you a much higher interest rate.
Tips to Consider
Not all banks are equal, some of the smaller regional banks are much better loaning money to small entrepreneurs than the bigger national and regional banks. Contact your local Small Business Development Center to find out which local banks offer you the best opportunity for a loan. Be sure to do all your banking at a bank that is “small business friendly.”
Do an internet search for Economic Development Resources in your state. For example check out this site for the state of Minnesota: www.ecodevdirectory.com/minnesota.htm. Often towns will have economic resources to help you get started. Sometimes if you look at smaller rural towns you might even find that the city has lined up some local business or investors to help you get started in your town.
Always consider using exclusive agreements to get cash. You can agree to make a product at a manufacturer in return for the manufacturer picking up tooling costs and you might also be able to strike an exclusive deal with a distributor to carry your product in return for an upfront fee. You can also use exclusive agreements with distributors, manufacturers or vendors in return for an investment in your company.