Written by Fernando Maciá
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Becoming self-employed, either as a freelancer or through the creation of a company, entails many difficulties that we must be prepared to tackle with determination if we are to succeed as entrepreneurs. One of the biggest headaches many entrepreneurs face is the issue of financing, when little or no equity capital is available. Do you think you have a great and innovative business idea, but you don’t have the means to make it a reality? Today we are going to talk a little bit about the financing tools that exist for freelancers who want to start their own business, open an online store or physical store.
Classic financing tools
Own savings
Starting with one of the most common ways to finance a business, we find ourselves with our own savings. Even if you do not have enough capital to cover all the expenses involved in starting a business project, it is highly recommended that you can contribute at least part of the investment, for the following reasons:
- Credibility. In order to convince other entities that investing in your business is worthwhile, you have to believe in it and in yourself. In addition, in most cases, it is a mandatory requirement for financial investors to be able to provide a minimum initial amount in order to apply for financing.
- Independence. Certainly, relying entirely on borrowed money is not the same as spreading the risk between a loan (regardless of where it comes from) and your own money.
When you want to start a business, it is essential to have some savings of your own that you can invest in it.
Friends or relatives
Another of the most common financing options is through private individuals, who can be friends or relatives, or even acquaintances, who have capital and trust you to support you in your new project. This type of financial support is known worldwide by its American term “Family, Fools and Friends“.
Bank loan financing
There are many types of bank financing available, although they are not always easy to obtain. Let’s look at the most typical possibilities:
- Medium and long-term loans. Money in exchange for the payment of interest over a certain period of time according to the points established in the contract.
- Mortgage loans. This type of loan is usually requested if the self-employed person intends to acquire some type of real estate in which to carry out his business, whether it is a commercial space, office or other.
- Current account credit policy. The financial entity makes available to the self-employed a certain amount of money for a determined duration. This type of credit involves a fairly high cost in commissions and interest, depending on several factors such as the interest for the total amount, and the interest for the amount used.
- Commercial discount lines. This consists of requesting an advance payment from the financial institution for a sale that has been made but has not yet matured.
- Microloans. As the name suggests, these are small loans, the advantage of which is that they are usually easier to obtain because of the relatively small amount involved. They usually have lower interest rates and less stringent conditions.
Grants, subsidies and allowances
The different types of grants can indeed be a small help, but they are not a financing tool on which you can fully rely, as you will not get the full amount you need for your project. They are difficult to obtain due to the requirements and bureaucratic procedures involved, in addition to the fact that the time required to obtain them can seem eternal. However, you should not stop trying, because help is never a bad thing. Some of the most common aids we encounter are:
- Aid for the hiring of workers, which is a rebate on social security contributions for the workers you hire.
- Bonuses in the self-employed quota, such as the flat rate for the self-employed.
- Investment grants, which consist of different financing programs, depending on the area of your business and the autonomous community in which you are located.
Alternative financing tools
Crowdfunding
This type of financing has become extremely popular in recent years, particularly through the Internet. It consists of a collective cooperation through small economic contributions from many people, destined to a specific project. A good example of a website used for this purpose is Kickstarter.
Leasing
This is a lease-purchase agreement for an investment property. One of its main advantages is that this type of financial product counts as a deductible expense, in addition to allowing the lessee to use the asset without having to make a very high investment. For example, if you are going to open a physical store and you need a commercial space, you can lease it. That is, you pay a monthly fee for that property as if it were a normal rental, but with the option of it becoming your property once you finish paying the total amount.
Renting
On the other hand, leasing is a renting without an option to purchase an investment asset, which can be medium or long term. Using the same example of the previous point, if you are paying rent for commercial or other premises, this option does not give you the possibility of the investment asset. In the same way, it is also not about mortgaging a property: if your business does not work, you close the doors without being tied to debts.
Confirming
Confirming makes it possible to transfer the responsibility for making payments to a company’s suppliers of goods to a bank. In this way, it is in charge of managing the company’s invoice payments, including both outstanding invoices and advances, and of negotiating the collection terms in which they are to be made directly with the suppliers. If, for example, a supplier company “A” does not want to grant a certain payment term to a company “B”, which is making a purchase, company “B” can request confirming from a bank that will make the payment. Thus, the sale and purchase transaction is executed smoothly, with company “B” having to pay back to the bank the amount of the invoice(s) with additional interest, obtaining the financing term it initially needed.
Factoring
It is the inverse product of the previous point. It consists of transferring the invoices of a company’s customers (in this case, yours) to a bank for a price established in advance, which will be responsible for making the relevant collections. As an intermediary, the bank may also assume the risk of non-payment of invoices.
Here are some of the most common financing tools for the self-employed that an entrepreneur can choose from to support starting his or her own business, at his or her convenience.
