When funding your MLM startup or new party plan business, there are two basic types of financing that you can pursue: debt financing and equity financing.
Debt financing is an interest-bearing loan, the cost of which has no direct relationship to your business’ sales, profits, or future growth. Instead, the cost of money is determined by the terms of the loan – interest rate and term of the loan.
Equity financing offers investors an ownership position in your business’s future and the right to share on some pro rata basis the profits and/or final disposition of the assets. Those taking an equity position will generally require some level of control over the day-to-day operating decisions of the business.
Debt financing and equity financing are not mutually exclusive, and often a combination of the two provides an option.
Here are some of the most common sources of capital you can pursue that are often a good match for a network marketing or party plan company:
Internal financing. In your business planning and in running your business, don’t overlook four important sources of internally generated capital. First, make sure you collect your accounts receivable (your income) as quickly as you can. Second, optimize trade credit by seeking out vendors and suppliers who will give you the longest possible payment periods. Third, improve your inventory turnover. Simply stated, inventory that sits in the warehouse is not earning anything and is tying up cash. Inventory that turns over more rapidly ties up less money and generates income more quickly. Fourth, consider leasing versus buying and subcontracting tasks versus doing things in-house.
Private investors. You can approach people you know very well, and even those you might know as well, to invest money in your business. Investors may be passive or active. Passive investors desire less involvement in the day-to-day operations of the business, whereas active investors desire more involvement in the day-to-day operations of the business. Private investors are almost always equity financers, although sometimes your arrangement with them will also include debt financing.
State and Local Development Agencies. Your state government, local community, and universities may have economic development or business development organizations. These organizations can be an excellent source of information for locally available low-interest loans and even business grants. Sometimes these organizations actually manage their own investment funds.
Commercial Bank Loans. Commercial banks offer several types of loans:
- Lines of Credit – The bank makes available a certain amount of money. You draw out funds as you need them. Interest is generally charged only on the funds drawn. Sometimes the bank requires the line of credit to be periodically paid down or even paid off (for example, once a year), after which the line of credit can be used again.
- Straight Commercial Loans – The bank loans money for a period of less than 90 days, after which the complete loan plus interest, is repaid.
- Character Loans – The bank loans money for a short-term, and the loan is unsecured. These loans are generally made only to individuals or companies of high credit standing.
- Collateral Loans – These loans are made to individuals or companies who give security in the form of real estate, inventory, or other assets.
- Bank Credit Cards – Although not thought of as such, the bank credit card is a source of funds. Credit cards generally carry relatively high interest rates and should be used only for small amounts of money to be repaid quickly.
- Term Loans – A term loan is a business loan with a maturity of not less than one year and usually no more than ten years. Interest rates can be fixed (set for the life of the loan) or variable (vary tied to some index like Treasury Bills) and payments are made monthly. Sometimes lower monthly payments can be negotiated with a “balloon payment” (paying off a lump some) at the end of the loan.
When pursuing any of these sources of funding, a professionally prepared business plan is a vital tool to convince the lender or investor of your credit worthiness. Most will want to thoroughly review your business plan prior to making a lending or investing decision. If possible, try to arrange for an oral presentation to accompany the presentation of your business plan so you can communicate your passion and vision for the business. It is important to realize that many investors and lenders will be initially skeptical of network marketing or party plan concepts, and must be educated as to the viability of your business model.