Every art business needs money to operate and grow and yours is no exception. You don’t need to go to business school to understand the basics of business financing – learn the basics and you are well on your way to keeping your art business viable and growing.
Why you may need financing
There are many reasons why you may need to finance your business. You may need extra capital for a short time or your need for financing may last many years. A few examples are:
- Purchase a new studio or building
- Purchase new equipment or supplies
- Fund living and travel expenses for a new project
- Pay back high interest loans
- Provide working capital for operations such as marketing, rent, employee expenses, etc.
The Two Major Types of Financing
There are many ways to look at business financing and one of the basic ways is to categorize financing into two groups: Your Money, and Other People’s Money (OPM). Most every business starts with using the owner’ or founder’s financial resources. As the business grows and this may be sufficient but for many businesses outside capital is needed.
Before you look for financing you will need to prepare some type of bank or financing package. Your financing package will describe your business, the funds you need and why, and how you will pay back the loan or provide a return to your investors/partners. If you have developed a business plan and have prepared financial projections you are well on your way to creating a financing package. Key elements in a financing package include:
- Why you are seeking financing, what the funds will be used for, how and when you are going to pay them back.
- Your business plan
- Financial projections showing the cash coming into and out of your business and an ability to make payments for your loan
- A story that will convince the lender or investor that you have a good chance of succeeding in your art business venture.
Most businesses are started with the founder’s own funds and a passion for an idea to make and sell a product or service – art businesses are no different. Keep in mind that the profits you make from selling your art that are “plowed” back into your business are a form of financing. Some of the common sources for financing with “your” money include:
- Savings and investments
- Gifts given to you
- Money generated by your business in the form of profits
- Financing from income earned from other jobs or careers
Other People’s Money
Friends and Family
In addition to your own funds, friends and family are a common source of financing small businesses. These may be in a form of a loan or an ownership stake or even an outright gift.
Equity Financing or Selling an Interest in Your Business
- We think of this kind of financing as selling stock in your company or getting a partner(s)
- This type of financing only works if you are a corporation or partnership. You cannot sell stock or have a partner if you are a sole proprietorship.
- This type of financing takes time and you will need formal agreements between shareholder and/or partners
- When you sell an interest in your business either in the form of stock or a partnership you may have to give up some of the control of your business. Choose your partners and shareholders carefully!
Debt financing is usually in the form of a loan to your business. Examples of debt financing include:
- Real estate loans that are usually long term in nature for periods of 8-30 years
- Equipment loans that are usually for terms of 3-10 years
- Working capital loans provide money for operating expenses such as rent, salaries, materials and are usually short term.
- Lines of credit
- Unsecured sources of credit such credit cards
- With most every type of debt financing you will probably have to personally guarantee the loan and the loan will usually be secured by the property (car, building, equipment) you borrowed to acquire, your accounts receivables and inventory. Even if you are a corporation you will probably still be required to personally guarantee the loan.
Leases / Renting
- With a lease you are not purchasing an asset such as a studio space or equipment, you are only paying for its use for a specified period of time. You monthly payments will usually be lower with a lease than a loan for purchase, but remember that at the end of the term for the lease you have no ownership in the leased asset. Many leases may also have a provision where you can buy the asset at the end of the lease for what is called the “residual”.
- Leases are typically provided for buildings, office space, studio space, equipment, and vehicles.
- Trade financing is where your suppliers give you short term credit to make purchases. This type of financing is usually 30 to 90 days and will show up on your balance sheet as an accounts payable item.
- Typically used to finance materials, supplies and some operating expenses.
- With a grant you are still using other people’s money even though there may be no expectation to pay back the funds on completing the specified project.
- Grants are given by many types of non-profit organizations, companies and governmental entities to fund a particular cause or activity. The type of grants given will vary by organization so make sure that your grant needs match types of grants given.
- You will need to apply for the grant and follow guidelines. The grant process may be short but most are a lengthy process with many steps. There are many companies and organizations that can help you with the grant process but keep in mind that they can’t guarantee that you will get a grant.
- With many grants you may need to partner with a non-profit organization as many organizations only give grants to non-profits and require that they be in existence for several years prior to receiving grant monies.
- Fiscal sponsorship is a hybrid way for you to be able to raise funds through grants or donations by having a “sponsor”
- The fiscal sponsor is usually a non-profit organization who collects and disburses the funds for a small fee
- The advantage of using a fiscal sponsor is that since it is a non-profit organization it is eligible to receive funds from foundations, trusts and other non-profits
- With a fiscal sponsorship your donors are able to receive tax write-offs for their donations since these flow through the fiscal sponsor (a non-profit)
- You are responsible for raising the funds NOT the fiscal sponsor. This type of arrangement may give your project more prestige if you are aligned with a respected fiscal sponsor and make it easier for you to solicit and receive donations or grants.
Some Final Thoughts
- Financing is the life blood of any business. The amount of funds you have available to run and grow your business will have a great impact on your success.
- Develop good relationships with your banker and other financial advisors such as your accountant or lawyer. Consult them before you get into any financing situation and make sure you understand what you are getting into.
- Your financing may also affect your tax situation. Be sure to consult your tax advisor prior to entering into financing agreements so that there will be no surprises when it is time to file your taxes.
- The best time to apply for a bank loan is when you don’t need the funds – get the process going early.
- You will need a decent business plan and financial projections to help you determine your financial needs and your ability to pay on loans or leases.
- Take advantage of the many resources available to you such as the Small Business Administration (SBA), SCORE as well as many programs offered by local colleges and organizations – most are free!