6 Ways to Fund Your New Business
by Tim Knox
Published on this site: May 18th, 2006 - See
more articles from this month
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:
- there is no "best" way to fund a new business; and
- 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.
Tim Knox is a nationally-known small business expert who
writes and speaks frequently on the topic. For more information
or to contact Tim please visit one of his sites below. http://www.dropshipwholesale.net
http://www.smallbusinessqa.com
http://www.timknox.com
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