How to Get Money to Make Money

Novice entrepreneurs often quickly learn the depth of truth behind the old saw “it takes money to make money.”

Still stiff lending standards continue to hobble many startups’ attempts to land loans. Even companies that are established - and profitable - are having a hard time raising funds.

So what’s a fledgling business owner to do? Beyond hitting up your friends and family or maxing out your credit cards, here are four funding ideas to help you get started:

Keep your day job

Still have a job? Keep it. Your current job can be a springboard to your own company. To paraphrase one of my favorite sayings: You can make a living during the day and work on your fortune at night. Just make sure your new venture doesn’t interfere with your day job and that you’re not in direct competition with your current employer.

Starting up while you’re still employed can offer a number of benefits. Chiefly, it will give you a steady stream of cash flow to depend on and possibly put toward your business.

Pay your company first

If you’re lucky enough to already have a couple clients under your belt, you might consider bootstrapping - that is, using your company’s cash flow to fund itself rather than relying on external financing. Many companies (including my own) have been built this way.

Since bootstrapping requires plowing business profits back into the company rather than taking them home, you’ll be amazed at the degree of focus you’ll exude. And if you thought you were a tightwad before, you haven’t seen anything yet. Building your business this way necessarily requires keeping expenses low and establishing optimal target markets.

How to bootstrap? Among other things, 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. While you’re at it, put your negotiating hat on and snag better terms with suppliers.

For an added boost, aim to pen pre-payment deals with clients or work on retainer. Forming a joint venture or a strategic alliance could also help you share some costs along with the risks while retaining full ownership of your company.

Borrow from your business

Maybe you want to take over an existing business. If so, keep your eyes peeled for motivated sellers. Just as with homeowners, there are business owners out there 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 you buy them out over time via a form of loan called 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, you. So, make sure you do your due diligence. Look for and avoid additional encumbrances like liens or law suits.

Turn revenues into royalties

Also gaining prominence among startups: 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 from 2 percent to 6 percent.

While this financing isn’t cheap, you can retain ownership and a full equity stake in your company, which can be extremely appealing to entrepreneurs. And since payments are based on a percentage of revenues, if you have an off month, you aren’t forced to pay a fixed rate - giving you greater flexibility to meet other bills as well.

This article was written by Brad Sugars and published in Entrepreneur magazine.