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How to generate start-up cash for a business

Novice entrepreneurs often quickly learn the depth of truth behind the saying "it takes money to make money".

Strict lending standards continue to hamper many start-ups’ attempts to secure loans and even companies that are established and profitable are having a hard time raising funds.

So what can a fledgling business owner do? Here are four funding ideas for entrepreneurs:

Keep your day job

Still have a job? Keep it. Having an existing job can be a springboard for starting a new company. To paraphrase one of my favourite sayings: You can make a living during the day and work on your fortune at night. The only important factors to consider are whether the new venture interferes with existing performance and if new business plans are in direct competition with a current employer.
Starting up while still being employed gives entrepreneurs a steady stream of cash flow to depend on and possibly put toward their business.

Pay the company first

Business owners that are lucky enough to already have a couple clients under their belts can consider bootstrapping – using the company's cash flow to fund itself rather than relying on external financing.
As bootstrapping requires ploughing business profits back into the company rather than taking them home, it can help business owners stay extremely focused, keep expenses low and establish optimal target markets quickly.
How to bootstrap? Among other things, business owners can work from home rather than rent an office; lease or even barter for equipment or services rather than buy them; and create "sweat equity", or deferred compensation, arrangements with skilled friends or vendors.

For an added boost, companies that secure pre-payment deals with clients or work on retainers have a more secure cash flow. Forming a joint venture or a strategic alliance could also help share some costs along with the risks, while still retaining full ownership.

Seller financing

Entrepreneurs that want to take over an existing business should keep their eyes peeled for motivated sellers. Just as with homeowners, there are business owners out there who are itching to sell. Perhaps they want to retire. Or maybe they're just sick of the daily grind of entrepreneurship. These kinds of owners may be willing to let others buy them out over time via seller financing.
In a typical arrangement, the buyer might make a down payment to the seller and then issue monthly or quarterly payments with interest over a set period of time until the loan is paid off in full.
Of course, not every seller will just want to retire. They may aim to pass off a failing business on an unsuspecting buyer. Potential buyers should do extensive due diligence and keep an eye out for additional encumbrances such as liens or law suits.

Turn revenues into royalties

Another financing option that is gaining prominence among start-ups is so-called royalty financing. Through this type of loan, owners must repay creditors (typically private equity firms) via a percentage of their business' incremental revenue – usually between 2% and 6%.
While this financing isn't cheap, entrepreneurs can retain ownership and a full equity stake in their company, which can be extremely appealing. And since payments are based on a percentage of revenues, if the company has an off month, there is no obligation to pay a fixed rate, which gives business owners greater flexibility to pay other bills.

* Pieter Scholtz is the co-master franchisor for ActionCOACH in Southern Africa. It is the fastest growing and largest business coaching company globally. Pieter and his partner Harry Welby-Cooke developed ActionCOACH across South Africa, which now boasts over 30 franchisees. He is also a certified, leading business and executive coach. He has successfully assisted countless business owners to significantly grow their profits and develop their entrepreneurial skills.


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