Posted By: jbaloun / |
A temp agency certainly isnt the most expensive new business venture. You dont need any heavy machinery or expensive materials when youre starting a temp agency. But you probably need some office space and business machines. And you may need to buy a little time until you turn cash flow positive. In any case, you will likely need to invest some money into the ventureat least initially. Without it, your new temp agency may be finished before it starts. But wheres the best place to get it?
First Choice: Starting a Temp Agency with Debt or Equity?
The first decision to make is whether you want to take on debt to start your business (debt financing) or whether you want to sell part of your new company for cash (equity financing). If you choose debt financing, youll be responsible for repaying the money, whether or not your business is successful. If you choose equity financing, your investors assume the risk, but you will give up part of your company. And if you succeed, the investors will earn a higher rate of return than the likely interest on a loan. In other words: debt financing is a greater risk for potentially greater rewards; equity financing means less risk, with potentially lower rewards. The course you choose depends on your situation and your level of optimism. If you feel the risk of failure is low and the investment needed isnt a frightening amount, debt financing may be the way to go. If not, you have to consider a range of options that could include equity financing.
Here are some alternatives for both debt and equity financing:
Leverage Your Own Assets
Maybe youre one of the fortunate few who has the liquid assets sitting in a bank or investment account. If so, no problem.
Investment from Friends and Family
Investments from friends and family carry unique pitfalls, of course. These are the people you least want to harm should something go awry in the business. But these are also the people most likely to have faith in you and your new business. Many entrepreneurs start out with help from friends and family, who often reap the rewards of the businesss success. One thing to remember though: youll definitely want to structure the deal with the same legal rigor you would with anyone else, or it may create problems down the road when you look for additional financing. Prepare a business plan and formal documents–you’ll both feel better, and it’s good practice for later.
Credit Cards
Credit cards carry a relatively high rate of interest. We dont recommend using them for long term investments. But because theyre quick and easy, they can be great for managing short term cash flow problems. And if you have a low introductory rate, they represent a good value, too.
Bank Loans
Bank loans can be hard to come by these days, but they come in many shapes and sizes, and some of the long-term rates are very favorable. If all you need is a few hundred dollars, you may easily qualify for a microloan from a local bank. If you need substantially more, you will no doubt have to back the loan with assetsvery often the equity in your house or your IRA, or a third-party guarantor, such as the SBA or a cosigner. If you obtain a line of credit rather than a fixed-amount loan, you don’t start paying interest until you actually spend the money.
Leasing
Rather than buy expensive office equipment, you can consider leasing, which frees up capital for other uses, or may even eliminate the need for much start-up capital at all.
Remember, youre starting your temp agency to make a profit.
If your business plan is tight and you have the skills to execute it, you should be able to manage a reasonable debt load. The key word here is reasonable. Borrow what you believe you need to execute your business plan, or sell enough equity to do so, but start-up is the time to be thrifty. Too much debt can become a drag on your business. There is money out there. Evaluate your options and make it happen.