High Investment Businesses and Low Investment Businesses
Getting money for starting a business, especially in these difficult economic times, is tough but need not be impossible. The process of finding money for starting a business, or financing a business, will serve to make sure that your business idea is a good one. If you can get financing that means that somebody has confidence that you will succeed and is betting money that you will.
Generally, the higher cost your business startup, the faster you should see a return on your investment. Take into account interest expense when calculating your return.
There are also low cost businesses with a great deal of potential. The person who can start his own business with very little money and perhaps no outside financing will usually invest “sweat equity” into the business instead of financial equity. This means that a low cost business may take longer to produce results. In the long run, however, if it has enough potential, it may be the right business for those that have few financial assets.
How to Get Money for Starting a Business–Start with Your Money First
Getting money for starting a business is one of the thorniest parts of starting a business. The first key is to save money so that you can put your own personal savings into the business. Nobody is going to want to invest in your business if you do not invest in your business yourself.
It is difficult enough to get a loan with a business startup and next to impossible if you don’t invest in your own business. Lenders want a track record and you may have none. Live frugally and save money so you can show potential lenders that you are committed to your business.
The Importance of the Business Plan
Before you look to outside sources for money for starting a business, make sure you have completed the entire business plan. The business plan template is your road map. It will tell you how much money you need, when you will need it, and when you expect to pay it back. Potential lenders will want that information and you should want it also. You should always prepare a business plan before asking anybody for money. The business plan outline I have prepared for you provides you with several free financial calculators including a Starting Costs Calculator, a Cash Flow Projection, and a Break-Even Analysis.
Understanding the Language of Business Financing
There are several business terms you should understand in order to make good decisions on getting money for starting a business:
A credit score is a numerical expression based on a statistical analysis of a person’s credit files, to represent the creditworthiness of that person. A credit score is primarily based on credit report information, typically sourced from credit bureaus.
Lenders, such as banks and credit card companies, use credit scores to evaluate the potential risk posed by lending money to consumers and to mitigate losses due to bad debt. Lenders use credit scores to determine who qualifies for a loan, at what interest rate, and what credit limits. The use of credit or identity scoring prior to authorizing access or granting credit is an implementation of a trusted system.
A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan. The debt is thus secured against the collateral. In the event that the borrower defaults the creditor takes possession of the asset used as collateral and may sell it to satisfy the debt by regaining the amount originally lent to the borrower.
Unsecured loans are monetary loans that are not secured against the borrower’s assets.
Collateral means a security or guarantee (usually an asset) pledged for the repayment of a loan if one cannot procure enough funds to repay. The amount of collateral determines how much lenders will lend.
Personal guarantee is a promise made by an entrepreneur to repay the company debts in the event of default by the business. If the business doesn’t have enough assets to pay the debts, the owner has to pay out of his personal assets. A personal guarantee tells the bank that the business owner is serious about his business and about repaying his debts. When the owner is unable to cover the debts personally, the bank will start to seize personal assets. In a startup situation it is virtually impossible to borrow money from a bank and not give the bank a personal guarantee.
Alternative Methods of Raising Capital for Your Business
Here is an interesting article on alternative methods of raising capital for your business.
You may think of borrowing money from a bank first. Think of the bank last. Here is a hierarchy of money sources after personal sources have been depleted:
- Friends and relatives Go first to the people who know you best; hopefully these are the people who trust you the most. Consider whether you will be offering an equity stake in the business or whether you want to borrow money. There are advantages and disadvantages to each. You don’t have to repay an equity stake; on the other hand you will be sharing your profits with the stakeholders. You may also give up some control over your own business.
- A lien on your home This has become much more difficult lately. It used to be that lenders would lend an ever-increasing amount based on ever-increasing home values which caused equity to increase which in turn could be used as collateral. That carousel has stopped, however, and lenders are looking much more carefully at your homeÂ’s (fallen) value as well as your ability to repay. Advantages of this source of money are low interest rates and a long period of time to repay. Disadvantages include the fact that you may lose your home.
- Credit cards This too has become much more difficult lately. Credit card companies are tightening the amount of money they will lend. Your all-important FICO score, indicating your credit history, will determine how much money you can borrow. Be careful about borrowing more on your credit cards than you can afford to pay back. Many people have borrowed too much money and have gotten into a cycle of ever-increasing debt amounts and ever-increasing interest payments. If you are conservative borrowing on credit cards, however, this can be a relatively easy source of funds.
- Inventory suppliers Ask your suppliers to finance your purchases for a longer period of time. This can be like free money; however the amount of time suppliers will be willing to carry you may be limited. As with other sources, be sure to pay your suppliers on the agreed-upon date. Inventory suppliers are your lifeblood. When they refuse to sell to you, you may as well close your doors. You have nothing to sell. Suppliers may also help you pay for advertising and promotional programs.
- Equipment suppliers Compared to your regular purchases, capital purchases can often be financed over longer terms. Consider also leasing equipment rather than buying outright.
- Your landlord In today’s economy, many commercial landlords are facing high vacancy rates. Many will be willing to negotiate lease improvements that they will pay for in exchange for a relatively long contract. They may also reimburse you for moving-in expenses and may give you a few months free of rent at the beginning of your term.
- Customers If you are giving credit to your customers you may want to encourage them to pay quicker by means of a discount. Making sure your customers pay you quickly will result in less need for financing so watch your accounts receivable carefully.
- Venture capital Venture capital is a type of private equity capital typically provided to early-stage, high-potential, growth companies in the interest of generating a return through an eventual realization event such as an Initial Public Offering (IPO) or trade sale of the company. Venture capital investments are generally made as cash in exchange for shares in the invested company.
- Revolving Loan Funds are an often overlooked way to get financing to start or expand a business. These funds come from local economic development agencies that are trying to increase jobs. BusinessLoanFunds.com has a list of Revolving Loan Funds by County.
Venture capital typically comes from institutional investors and high net worth individuals and is pooled together by dedicated investment firms. If your new business has enough potential, venture capitalists may be interested in investing in it.
- SBA loan guarantee programs The Small Business Administration (SBA), an agency of the federal government, has a program whereby they guarantee a loan made to your business by a lender. There are SBA loans on continuing businesses as well as startups.
- Leasing companies A commercial lease on capital equipment can be a lifesaver for startup businesses. Business equipment leasing can reduce your initial costs for acquisitions and can increase your cash flow. You can often borrow more advantageously from a supplier; however, if a supplier has no leasing program, this can be an excellent source of funds.
- Finance companies Expensive alternative. These companies typically have no money of their own. They finance the business and borrow the money from a commercial bank. They will also sell the loan to a “loan holder” and use those funds to pay off the commercial bank. Often they make their money by servicing the loan. Everybody needs to make money which is why this is an expensive but sometimes necessary alternative.
- Banks A banker will want to see your detailed business plan; he will want to make sure you’ve got a track record and that he trusts in your ability to pay back the loan. He will most likely ask you to provide the bank with plenty of collateral. Be sure to see a business banker, preferably one you already know or one your CPA knows.
How to Get Loans
- Complete your entire business plan. It is your road map.
- Get the help of a good CPA. CPA’s typically have good contacts.
- Check out BusinessLoanFunds.com list of ways to finance a business.
- Be prepared to give the lender the following documents he may ask for: business and personal financial statements, business and personal tax returns, your business plan including cash flow projections.
- Suggest a proposal with which you can comply for how you will repay the loan. Be honest and conservative. Lenders don’t want bad surprises.
- After you have borrowed the money, make sure you stick to your agreements. If you cannot, communicate with the lender as soon as possible to work something out.
For More Information
You have a great idea but unless you find the right financing, your inventions may never get beyond the notebook. With “All I Need Is Money”, you’ll find out how to secure the funding you need to make your invention a reality.
You Now Know…
The most frequent reason for startup companies to fail is because they are undercapitalized. That means they haven’t got the money for starting a business. You now know:
- To capitalize a business start first with your own money.
- A business plan is crucial to being able to borrow money.
- The language of business financing.
- That there is a hierarchy you should follow in borrowing money from least difficult to most difficult and from least expensive to most expensive. You have learned that hierarchy.
- How to get loans.
- That there are advantages to starting businesses which require small monetary investments.
- Where to get more information.