One of the greatest challenges facing small business owners in Tanzania is the availability of funds for starting and operating the business.
When banks decline financing for the new business, as they mostly do, entrepreneurs may feel the need to resort to creative financing options. With some persistence and an open-minded approach, almost any business can receive additional funding through creative means. These options including taking a loan from a retirement account, taking on a partner, and using home equity as capital financing, Cash Floats
1. Take on a partner. Ask a former co-worker, boss or friend about accepting a business venture. Speak to him about providing startup capital and offer what you can afford, plus sweat equity — which is work put into the business and repaid through the company’s earnings. Draw up a partnership agreement that details each partner’s role and financial commitment along with a buy-out option.
2. Cash Floats. In this technique an entrepreneurs rely heavily on OPM (Other People’s Money) when they don’t have any of their own to launch a business with. It makes sense to use OPM even
when you do have your own money to mitigate risk–your risk. One of the greatest American industrial companies was launched using cash float financing technique. I’m referring to the Ford Motor
Ford knew he could never afford to pay for all the materials needed to build a car up-front. So instead, he negotiated deals with dealers obligating them to pay cash for his cars. Then, he convinced suppliers to let him pay for the materials 30 days after receiving them. In this way, Ford could get his parts right away, build his cars and sell them to dealers at a profit before any of his expenses came due.
3. Silent Partners or Angel Investors : Another creative financing technique at your disposal is to seek out a silent partner. A silent partner is any investor who puts money into your business in exchange for future profits but does not have a voice in decision-making. This could be a wealthy relative, a co-worker or anyone else you can persuade to invest. Be careful, though, not to accept silent partner investment from just anyone. The ideal scenario is taking a little from someone who has a lot, as such people are unlikely to freak out about the inevitable ups and downs of a new business venture.
4. Consulting Work: consulting work can help provide early seed money for new businesses,In his essay How To Fund a Startup, Paul Graham wrote,
“Another way to fund a startup is to get a job. The best sort of job is a consulting project in which you can build whatever software you wanted to sell as a startup. Then you can gradually transform yourself from a consulting company into a product company, and have your clients pay your development expenses.”
Graham’s advice was admittedly tailored to technology startups, But one can envision the same model being applicable to other service businesses. Someone looking to start a small to medium-sized accounting firm, for instance, can take on freelance jobs in the early going and resolve to put most or all of that money toward growing his company. Different types of services businesses could conceivably do the same.
5. Hard Money Lenders: If your business is in a pinch and absolutely needs money by yesterday to capitalize on an opportunity, there are always hard money lenders. Payday lenders, for instance, make short-term loans at high interest rates. You get these loans from SACCOS, small Microfinances at a rate of 10 to 30 percent per month!
But beware: there are very few circumstances when going to this type of lending establishment makes sense. The correct time to utilize a payday lender for business purposes is when you face a money-making opportunity that is certain, but fleeting, and which requires cash at once. If you can get the money quickly and use it for a deal that returns Tshs. 50,000,000 what does it matter that you paid Tshs. 5,000,000 in interest to get it? Then again, consider this your last resort for financing, to be approached only if you’ve exhausted all other options listed above.
Its your call, If you’re failing at raising outside money but determined to take your project
from concept to operating company, you have a choice. One, you can continue
wasting more time chasing after disinterested investors and banks. Two, you can start to
make some headway today towards traction by learning from the elite
entrepreneurs who understand how to exploit entrepreneurial finance techniques
such as cash floats and others explained above.
Share with us If you know of any other Financing technique for a small business that worked for you or someone you know.