Get Your Business Funded

Creative Methods for Getting the Money You Need

Steven D. Strauss

• Publisher: Wiley
• Year: 2011
• ISBN:
  9781118086650
• Edition: 1
• Topic: Business
• Subtopic: Piccole imprese
• Index: Business

Explore the many options available to get the money you need for your business

Whether your business is a new start-up, an established company attempting to grow, or somewhere in between, Get Your Business Funded gives you the full range of options for raising capital in today's challenging economy.

Covering everything from bank loans to angel investors to equity financing to more unorthodox methods, this complete guide uses clear, easy-to-understand language to explain each approach.

• Divided into two sections: "Sources and Funding" and "What You Need to Know"
• Explains such unorthodox financing sources as peer-to-peer lending, online grants, business plan competitions, and the "friends and family plan"
• Reveals untapped funding streams available through the government
• Follows on the success of the author's previous work The Small Business Bible

Pick up this reader-friendly guide and discover the many ways you can Get Your Business Funded right now.

Section I

The Traditional Route

Chapter 1

Personal Assets

Essential Idea: Tap Your Own Personal Assets to Get the Money You Need

When my colleague Jim wanted to start his own business, it seemed out of reach. His credit was not the best. He did not have wealthy parents and so the friends and family plan seemed like a long shot. And he had little in actual savings, so even that was not a viable option.

But Jim got creative and found a way to launch his dream. Today he is four years self-employed, happy, and making a good living. How did he do it?

• Although he did not have any savings, he did have some stocks that he had held on to through the years. Though he liked owning them, he liked the idea of owning his own business more. He sold his shares.
• Even though he did not have wealthy parents, he did have a grandfather who was likely going to give him a small inheritance one day. Jim approached Gramps, explained the situation, showed him a simple business plan, and found that Gramps was happy to give Jim the money while he (Gramps) was still alive.
• And even though Jim had no savings, he did have a strong work ethic. Jim got a second job for six months, saved the money, and then used it to start the business.

Jim did it all without going into debt and without having to barter away part of his business. He did it by using his own resources. If Jim did it, so can you.

Using Personal Assets

According to SBA.gov, “The primary source of capital for most new businesses comes from savings and other personal resources.” Personal resources can mean all sorts of things: savings, money market accounts, stocks and bonds, whole life insurance, and more. Whatever the case, using your own personal assets is the subject of the first chapter of this book because that is where most people start when looking to fund a business, and likely where you will need to begin as well.

In addition, it will be very hard to ask anyone to invest in your business—be it a bank, angel investor, uncle, or whoever—if you do not have some of your own money invested too. Entrepreneurship is a risk. For you it is a risk of many shades: financial of course, but also emotional and professional. But lenders and investors have little interest in those latter two risks. What they want is to see that you are willing to accept your fair share of the financial risk. That is where using your own actual capital, like savings, also comes into play. For starters, it proves you are serious.

There are both pros and cons to this strategy:

Pros

• You incur no debt.
• It comes interest free.
• You need no one's approval.
• You will not be liable to others.

The last point is significant. The fact that you can get creative and possibly obtain some or all of the money you seek with no strings attached is no small matter. As you will see throughout this book, getting the money you need almost always requires the assistance and/or approval of someone else—a lender or an investor, for instance. But by using your own assets, you avoid that complication altogether. And not only do you not need their approval to use your own money, but you also do not have to pay it back to anyone else. Sweet.

One other benefit of having your own skin in the game is that you will likely be just that much more invested and committed to the venture's success. Of course you want to succeed and you plan on doing so, and while no one ever wants to lose someone else's money in a business enterprise, the fact is it still is someone else's money. Using your own money is like Cortez burning his own ships; it eliminates failure as an option.

When explorer Hernando Cortez landed in Mexico, he wanted to be sure that his mission would be successful. Therefore, upon arrival Cortez famously told his men, “Burn the ships.” His crew thought he was nuts, but Cortez repeated the command: “Burn the ships,” adding, “If we are going home, we are going home in their ships.” His men eventually acceded to the captain's order and did in fact burn their own ships. Why? Cortez had convinced them that by burning the ships, failure was not an option. By using your personal assets, you are burning the ships.

Cons

• You will in fact be using up your own resources.
• You may also be using your rainy day fund.
• It is risky.
• You still may not have enough to get started, and then what?
• It may not be the best use of your money.

That last point is significant. Starting a business is a big deal. The business will likely require a substantial infusion of capital to get up and running, and then stay running. As such, the question to consider is the potential lost opportunities of using your financial assets in this manner. Will there be other things that you will be unable to do or invest in because your money is tied up in your business? The answer is yes. You need to be comfortable with that fact going forward. Think it through carefully.

With those caveats in place, let's examine a little more closely the different ways to tap your different assets.

Savings

The best way to use savings for a business is, to the extent possible, plan for it. That is, plan ahead and begin to save now for the money you will need later. Of course, you may not be able to save everything you need, but every little bit helps. It also may be true that you don't have time to plan ahead and you need the money for your business now. That is fine too. Not ideal, but fine nonetheless.

The other thing to consider when using a savings account is the extent to which this money is your safety net. Again, be thoughtful. Be a businessperson and analyze the pros and cons carefully. Sure, it is exciting and fun to start a new business, but it is depressing and terrifying to not have any savings in the bank. Double-check your plan and willingness to take a risk. In fact, you may want to even consider not using all of your savings for your business venture and instead keeping, say, $5,000 or so in the bank. That rainy day fund will likely come in handy someday.

Investments

When people think of using their own money for their business, often “savings” are both what they consider and what they consider to be the stumbling block. Either they do not have enough saved up to make a difference or they are afraid of spending their nest egg. While the former is certainly understandable, the latter is less so in this context. If you want to start a business, the drive must be so strong that even your own bank account cannot get in your way. If it does, if the risk is too much, that is understandable, but can also be a sign that entrepreneurship may not be for you.

That said, it is important to understand that there is more than one way to skin a cat. People have all sorts of assets, not just savings. Mutual funds, stocks, bonds, CDs, pieces of art, antiques, old cars, new cars, baseball cards—all can be liquidated to serve your needs.

And of course there are all sorts of ways and places to sell your assets: an estate sale, Craigslist, eBay, a consignment store, the newspaper, and specialty newspapers and magazines, to name a few.

Inheritance

There are two ways to use an inheritance for a business.

The first is the inheritance that you have not received yet; that is, an inheritance you expect to get. You may be sure that you are going to get that inheritance, but truly, a person can change a will or trust at almost any time before their death. As such, this first method actually deals with the expectation of an inheritance.

Do you really want to ask your grandfather (for example) for an advance on that expected inheritance? That is the question you must ask yourself. If the answer is yes, then you begin this process by having a chat with the person from whom you expect to get the inheritance. Needless to say, this can be a very tricky, touchy, verging on tacky discussion, so first and foremost it must be handled delicately.

The important thing is to make the giver understand that it is a smart move on their part. There are two ways to do this:

1. First, explain how you see the money being used in your business and how it is a good use of the potential gift. This is where a business plan will come in handy. Although Gramps will likely never read it, he will feel better knowing it is there.

2. Second, explain that there are tax considerations involved. Currently, the tax code allows someone to give a gift of $13,000 ($26,000 if it is to you and a spouse) tax free. If the amount you want is more than that, the giver and you will need to consult with an estate lawyer so as to determine how best to make the gift. By treating this issue with the respect it deserves, you make your request for an advance on an inheritance more plausible.

The other thing to consider is the effect of the advance on the overall estate of the giver, and on the other people who will be sharing that estate when your loved one passes away. They may not like it, and may think that you are devaluing the overall estate by taking money out early. That is an issue you will need to handle.

The bottom line is that you need to be considerate of everyone involved, and equally professional. It may be a good idea to first speak with an estate lawyer and a financial planner. Learning how an inheritance advance may affect everyone else is important. Equally important is gently helping them to understand how it can affect you in a positive way by funding your dream.

The other way to use an inheritance for a business is the situation where you are actually already due money from an estate. This usually occurs in one of two ways:

1. Someone died and the estate is in probate. Probate can easily last a year, so in this scenario you may be due money but not for a while.

2. A trust was set up and has not been 100 percent dispersed.

An inheritance can be created in many ways. The first is where the decedent died with a will and named you in that will. A second way is if...