To find money to launch or maintain your business in the early lean years can be a full time job by itself. We wish it was as easy as finding it under a couch somewhere. Quick money options are tempting but can be a dangerous gamble if sales don’t grow as quickly as you expected.
Online lenders such as Kabbage and OnDeck have the advantage of speed and simplicity. No longer do you have to don your best suit and spend precious time out of your work day meeting with the bank. Now you can go online and complete an application in about an hour. Approval and monies can follow in just days opposed to the traditional process which can take weeks or months.
If you have a large amount of invoices still waiting on payment, consider factoring and invoice advance companies like Fundbox. These businesses offer advance payments for outstanding invoices to alleviate cash flow crunches. By paying ‘clearing fees’, which are determined by the health of your business and the specific invoices you want to clear, companies like Fundbox will provide specific fees upfront before you agree to any terms to accept any dollars. Factoring allows the business to fill the gap between billing and accounts receivable.
Another alternative we’ve seen businesses use is crowdfunding, by raising many small amounts of money from a large number of people, typically via the Internet. We’ve seen some small businesses use this, and then reward the investor with some sort of premium normally not available to the general public, such as access to a frequent buyer rewards program.
Be prepared, regardless of the source, that a lender will want to see some sort of financial statements in the form of a balance sheet or profit and loss statements., whether it be for a historical period or projected.
Remember that whether your funding is through a bank or via crowdfunding, there will be specific tax implications for the increased cash flow into your business. Any ‘investments’ or contributions into a small business will be traced with a Form 1099-K, which triggers the IRS to look for those dollars in a company’s capital. This relatively new form, introduced three years ago by the IRS was meant to track sites like Amazon and Paypal that process payments for crowdfunding. The Form is a requirement for any customer who receives over 200 annual transactions totaling at least $20,000. That’s not to say that smaller projects and contributions aren’t taxable, they are, but they create a slightly less documented complicated paper trail to follow. Sites like Kickstarter often offer product, personal appearances or online meet and greet opportunities for supporters who contribute over a specific amount.
Whatever funding option you choose, it’s important to understand that each choice has its own set of legal, tax and accounting requirements. Before you step into this field select tax preparation services or talk with us.
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Copyright 2015 by Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, a PASBA member accountant, located in Londonderry, New Hampshire.
