Small Business Start Up Loan: How to Fund
Small Business Start Up
I’m
often asked: what is the best way to finance a new business venture. This
question is usually followed by "So, do you ever invest in new business
ventures?"
The
answers, respectively, are: 1. there is no "best" way to fund a new
business; and 2. I do invest in new business ventures, but darn it I can’t
today because I left my checkbook in my other suit.
The
truth is there are a variety of ways to finance a new business and which
way is best for you depends totally on your product, your market, your
financial requirements, your burn rate, and most importantly, your
personal and financial situation.
So with
that in mind, here are a few of the most common ways to finance a new
business without hitting old Tim up for a loan. Keep in mind that all
methods have pros and cons and some (or most) may not work for your
specific situation. No matter what financing method you choose thoroughly
investigate the ups and downs and don’t jump in with both feet until
you’re sure you’ll land on solid ground.
Savings
and Investments
The
first source you should consider tapping is your own savings and
investments. I’m a huge fan of self-financing when it comes to business
because it doesn’t make you responsible to others should the business
fail. The bad thing is that it if things do go under, it will be your
money that goes down with the ship. If you’re not willing to risk your own
capital you certainly shouldn’t be willing to risk anyone else’s.
Friends
and Family
After
tapping their own savings and investments, many entrepreneurs turn to
friends and family for help. This works well for some, but here’s the
creed I live by: NEVER borrow money from anyone you have to eat
Thanksgiving dinner with. Nothing causes tension in a family like lending
money that is never paid back. And notice I say "lending money" rather
than investing money. Venture capitalists invest money. Your relatives
lend you money. They will expect it back someday even if they say they
won’t. Remember, when a loved one invests in your business they are
emotionally investing in you. It would be tough to tell mom and dad that
their favorite son lost their life savings because his business went down
the drain.
Credit
Cards
I
financed my first business on credit cards, which was an incredibly stupid
thing to do given the fact that my business could have failed and left me
with thousands of dollars in credit card debt that would have taken until
the year 2099 to pay off. It worked out in the end for me, but if you
decide to finance your business on plastic keep in mind that you will be
paying extremely high interest rates on the money you’ve borrowed and
unless you hit it big you will be paying for that money for many years to
come.
Mortgage
The Farm
Bank
loans are next to impossible to get if you don’t have collateral and a
track record of business success, which is why many entrepreneurs use the
equity in their homes to finance their business after being turned down
for a bank loan. While this makes more sense than building a business on a
deck of credit cards, the financial risks are no less abundant. You must
pay this money back whether your business succeeds or not, but it is a
good source of low interest money to get you started and the interest may
be tax deductible (check with your accountant to make sure).
Angel
Investors
An angel
investor is typically a wealthy individual who invests in start up
ventures for a share of the ownership. Angel investors are usually the
first formal investors in a business and provide the seed money to get the
business up and running. Some angel investors will write you a check and
leave you alone to run your business while others consider their
investment a license to "help you" manage and make decisions. If you do
accept angel money make sure the terms are clearly defined on both sides.
Angel money always comes with strings. Make sure you know whether those
strings come in the form of a bow or a noose before you accept an angel’s
check.
Venture
Capitalists
Venture
capitalists are to angel investors as pit bulls are to Chihuahuas. That’s
not to say all VC are big, bad dogs, but they do have powerful jaws that
can chew up your business and spit it out if things don’t go their way. VC
money doesn’t come with strings, it comes with chains and locks and lots
of legal documents. VC always have the upper hand in any deal they invest
in. That’s just how it works and that’s the price you pay to get access to
VC money.
If your
business gets to the level that VC money becomes a viable option, don’t
jump at the first bone a VC dangles before your eyes. If one VC likes your
idea, others will, too. Present to multiple VC and carefully consider each
offer before you accept the check.
Just
remember, no matter how you finance your business, use the money wisely.
Don’t buy $1,500 plasma monitors and $1,000 Hermann Miller chairs.
Have a
very clear plan of how the money will be used and how it will be paid
back.
And
remember this, the more you can shoestring the business, but more of the
business you will own in the end.
Small Business Q&A is written by veteran entrepreneur and syndicated
columnist, Tim Knox. Tim serves as the president and CEO of three
successful technology companies and is the founder of
DropshipWholesale.net, an online organization dedicated to the success of
online and eBay entrepreneurs. Tim's latest book is "The 30 Day Blueprint
For Success!" We asked 58 Top Internet Money Makers: If you lost is all
tomorrow and had to start from scratch, what would you do to be back on
top in the 30 days? Their answers just might make you rich!
Related
Links:
http://www.prosperityandprofits.com
http://www.smallbusinessqa.com
http://www.dropshipwholesale.net
http://www.30dayblueprint.com
http://www.timknox.com
