• Venture capital (6%)
• SBA loans (3%)
None reported tapping the fairly new, but soon-to-explode world of crowdfunding, which we shall discuss in Chapter 15.
Never Enough
Can you guess what these same entrepreneurs said was their biggest mistake or challenge their first year? That’s right: Shortage of capital.
“One of the primary reasons why most businesses fail is a lack of available cash,” warns Mitchell Weiss, a former financial services executive and the author of Business Happens. “People just starting out don’t want to borrow or think about it. As lots of people know, you can get money when you don’t need it and it’s hard to get it when you do. You want a line of credit so you can tap it when you need it.”
In this book we’ll talk about the merits (and downsides) of many of these financing approaches and how you may be able to use them get the funding you need. We will also share some you may have not heard much about such as raising money from foreign investors seeking US visas, merchant cash advances and SBIR grants.
But we’ll also talk about something you typically won’t find in a business financing book: How these methods may affect your credit.
Starting a business is risky. You’ve seen the statistics about how many fail. But you wouldn’t be reading this book if you aren’t at least contemplating entrepreneurship. Our goal is to help you minimize the risks as much as possible. Starting a risk-free business isn’t realistic. There are no guarantees in life. But learning how to minimize the risk to your personal credit and your personal assets will make it easier for you to weather the inevitable ups and downs.
In Part One we will discuss the various types of financing available to you.
In Part Two we will review the foundation you need to develop ongoing funding. Part Three will focus on the various ways to bring investors into your company. And in Part Four we’re going to provide some caution and some strategies for success.
Let’s get started.
Chapter 1
Popular Financing Strategies
It takes a lot to impress the “Sharks” on Shark Tank, the popular television show where entrepreneurs pitch their business ideas to successful millionaires and billionaires in hopes of bringing them on as investors and partners in their businesses. When 35-year-old Julie Busha shared her product line, Slawsa, a unique condiment that is a cross between salsa and coleslaw, the judges not only loved the taste but they were clearly impressed by the fact that she was willing and able to forgo a salary in order to funnel all sales proceeds into the growth of the company.
She was able to do that because she funded the company entirely from personal savings. In fact, when the opportunity came for her to buy Slawsa from her former partner, per his request, she was able to do so without getting a loan. She had set aside a nice nest egg from the decade she spent as a sports marketer, primarily in NASCAR, and says she dug into her savings to finance much of the start-up costs: production, travel to pitch retailers, marketing, legal costs and more. “It’s not cheap to start a company, especially in an industry as highly competitive as the grocery one; it takes a special effort” she says.
Billionaire Shark Tank investor Mark Cuban was extremely supportive of Busha telling her “you’re an example like we rarely have in here and I’ll be a customer for life.” Cuban also expanded after she left the room, “The fact that she scrimped, has no debt, pays off her credit cards, saved up enough money to invest into this company and buy him out is such an amazing example for everybody.” Fellow Shark Robert Herjavec also shared supportive comments about Busha’s work ethic.
When she secured a coveted spot on Shark Tank, Busha had to ramp up production to meet the expected demand the show would generate. She and her husband borrowed equity from their home to fund that. “It is easy?” she says. “No. But I’m not doing this because I think it will be.”
Most Popular Financing Methods
The four most popular ways to finance a business are the ways you would expect: Personal savings, loans from friends and family, home equity loans and personal bank loans.
Let’s review each one.
Personal Savings
Conceptually, it makes perfect sense that using your personal savings to start and finance your business is the first choice for entrepreneurs. There is no interest expense, no creditors wanting to be paid back and no awkwardness or embarrassment in asking others for money. You simply go to the bank and pull out your savings. (Hopefully, you are using a separate corporation or LLC and the money gets deposited into a separate business bank account.)
But in taking this very easy and rational step please ask yourself some equally rational questions:
1. Can I afford to lose all this money?
2. Do I understand that not every business succeeds?
3. How long will it take me to save this amount of money again?
4. How would a loss of this money affect my family?
5. Have I thought enough about alternative ways to finance the business?
In presenting these questions we are not trying to deter you from your goals. Instead, we want you to be realistic with them.
Most businesses need financing along the way. They need it at the start-up phase, the growth phase and all the other phases that occur during the life of an enterprise. If your personal savings can cover every phase, good for you. (You can stop reading now.) For most of us, we need to have alternative financing methods in mind. We need to keep reading this book. And by learning the various financing methods we then have to ask: Should I use up all of my personal savings to get the business going? Should I consider the other alternatives so that not all of my savings are at risk?
We should also clarify what we mean by personal savings. They do not include money in retirement accounts. Your IRA and 401(k) are savings for your sunset years. They are usually protected from creditors and the bankruptcy courts. Pulling these monies out of a protected retirement account (which can incur large penalties and fees if done wrong) may be a very bad move. If your retirement age is nearing and you don’t have enough time to rebuild depleted accounts, it could be disastrous.
Beware of charlatans on the internet claiming you can easily use your retirement money to start a business. These firms tell you that by using a self-directed IRA or a special 401(k) you can easily use your retirement funds to invest in your own business. But what they don’t tell you is that the IRS has strict rules regarding such transactions. We will discuss these issues further in Chapter 6.
The bigger point here is that whether it is your personal savings or retirement savings, you may not want to go all in. You may want to use other proven strategies to finance your business or real estate investment.
Let’s consider the second most popular method.
Friends and Family
Friends and family have always been a great source for boot strap financing. Friends and family want you to succeed and are a lot more likely to take a chance on you than any bank would. That personal belief in you, that personal connection, is a special bond. Be very careful about testing it with a business transaction.
Your relationships are more important than your business. We start with that premise. Accordingly, many seasoned entrepreneurs advise others to never accept money from friends and family. Their take is that if your idea has merit you can find an angel investor and avoid testing a personal relationship altogether. Friends and family members have lost money in the past and will do so in the future. Do you want to be the one to have to confront it every Thanksgiving?
You have to ask yourself that same question. It is gut check time. This type of financing is often called the “family, friends and fools” approach. We don’t want you to be the fool for taking