Internal Sources of Capital

Tap non-bank sources for credit to keep your small business afloat

For many entrepreneurs, particularly those just starting out, raising money can seem like an insurmountable challenge. Companies with little to no track record can find it extremely difficult to secure a bank loan. But don't let that deter you. In fact, asking your local banker to lend you money may not be the wisest decision when there are other ways for a small business to raise funds.

Bootstrap financing means helping yourself without the direct help of others. Think of all the assets, both tangible and intangible, that you and your company have. You can finance your company's growth by leveraging these assets.

Three primary sources you should consider when seeking to raise internal capital are:

1. Suppliers. They want to see you succeed because your success translates into higher sales for them.
2. Real estate. There's equity waiting to be tapped.
3. Customers. They are your biggest resource. Use them.

 

Ask for trade credit

Suppliers generally will grant regular clients credit for 30, 60 or 90 days, without interest. When you are launching a new business, getting these trade credits will be difficult, but try to negotiate them.
Try: Speak with the owner of the business or the person who handles the supplier's finances. Ask the supplier to give you 90 days' credit while you only extend 30 days to your customers. Business Owner's Toolkit has excellent advice on where to find and how to use trade credit. MasterCard has a good online booklet about cash management in general.

Use a factor

A factor is a business that buys the accounts receivables of other businesses. When done right, factors reduce your internal costs and free up cash flow by getting you money that would otherwise be unavailable.
Try: AdvanceMe gives a lump sum payment when it buys a fixed dollar amount of a business' future sales at a discount. Capital Solutions offers a free financing evaluation. Also, many of the major banks have a factoring division like Wells Fargo's Business Credit program.

Tap your customers

Sometimes the fastest way to generate internal capital is to get it from your customers. Invoice them for products and services before delivery. That way you will be using other people's money to finance your business operations.
Try: Get free advice from the counselors at SCORE. AllBusiness has a resource called "60-Second Guide to Collecting Payment."

Unleash the equity in your business

If your home has appreciated in value, draw down some of the equity through a home equity line of credit. If you need to acquire real estate for your business operations, lease instead of buying.
Try: Talk to your mortgage lender for more details. Check out current home equity line interest rates on Bankrate, E-Loan and Lending Tree.

 

• Register your company with the business credit bureaus. While not required, it helps ensure that suppliers are reporting your payment history. A record of consistent and timely payments builds your company's financial trustworthiness.
• By using internal sources of capital, you help ensure that down the road your business will be worth more because it has less debt. Your company will save money by not paying interest on traditional bank loans.
• With less conventional debt, your business will look financially stronger to future creditors and investors who want to see a healthy balance sheet.

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