June 29, 2011
Entrepreneurship Graduate Group Coaching Call
Introduction-
One of the first things my students who are starting a business or creating a new product is, “Where can I get money for my business or project.” I have come to think all business owners and inventors are broke. Of course money controls everything. If you have money you can create businesses and invent products. If you don’t have money you better find some. Following are a few ways to raise money.
Banks-
Yuk! I hate banks. Bankers are some of the most uncreative, and fearful people I know. They don’t know what risk is. Maybe there is a good reason since after five years 50% of new businesses fail. Not very good odds. In this economy, you can pretty much forget getting a business loan from a bank. They have money but will not risk it. If you have money they will give you a loan. If you have collateral such as equity in your home, they will lend you money but other than that, you better have a brother in law who is a banker.
Credit unions-
They are pretty much like banks accept they are owned by the members and tend to be more flexible on loan qualifying. Get to know a loan officer at a credit union and build a relationship. They are more willing to take a risk.
SBA loans-
Guess what? The Small Business Administration does not loan money. They give banks a guarantee that if a borrower defaults on a loan, the federal government will cover part of the loss. You still need collateral.
Second mortgage-
If you have a home or some rental property that has equity you can get a second mortgage. Of course you will put your property at risk if your business fails. Second mortgages have higher interest rates but if you have no other choice take it.
I took out a second mortgage to buy my first rental property.
Home credit line-
Pretty much like a second mortgage only you don’t get the money all at once. Again, you need collateral.
Private investors-
People like surgeons, commercial real estate brokers and bank robbers have to do something with all the money they make or President Obama will take it all in taxes. They invest in stocks, oil exploration, real estate and a lot more stuff. Physicians are famous for being bad business people. Maybe if yon have a great business play he/she will invest in your business or project. Identify who the private investors are in your state and contact them.
Investor groups-
There are people who have money to invest and like to spread the risk with other investors. These investor groups usually specialize in certain areas of investments like real estate. Check around for investor groups.
Limited partnerships-
These are like investor groups but different. Ha! They use a different legal entity to do their investing. I have been involved in limited partnerships in oil exploration. These are more often groups to earn money rather than invest.
Friends and family-
Here is where you can break up a family. Friends and family are the first place most people go to get money for a project or a business. If you don’t want to ruin your family you better tell them that starting a new business venture is very risky and they might loose their investment. You need to show them a business plan and make sure it says they could loose their money. I have seen a number of families break up over this very thing.
Grants and community development funds
Check with the chamber of commerce and see if they know of any grants for business. The government gives special treatment and tax advantages to women owned and minority owned businesses. You might want to put the business in your wife’s name.
401-K
Don’t use it. It will cost you a 10% penalty plus the money you take out will be taxed at your regular tax rate. It is like getting a loan for 30 % interest.
Cash value insurance-
Some life insurance policies develop a cash value over time. You can borrow some of that money out of the policy but it decreases the death benefit by the amount you take out.
Credit cards-
Thank goodness for credit cards. There are more small businesses started with credit card funds that any other financial instrument. The interest rates are high but the money is much easier to get than from a bank.
These are some of the basic ways to fund a business. Of course there are many other ways such as angel investors and venture capitalists but you can Goggle them and read about them. Good luck funding your project.
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