We’ve discussed the importance of “You, Inc.”, running your personal finances like a business at least two years before actually starting your business. Now, let’s discuss the gas that you need for your business to run, and that is money.
The number one reason that a business fails is because it is undercapitalized, which means that it runs out of gas before it starts making a profit. There are many reasons why a business runs out of gas including not having enough capital in the first place. One big reason for many businesses failures, however, is that some business owners view their business as their own personal piggy bank. I know one business owner who gave his wife an allowance of $3,000 a month for three years. At the end of the three years, he told her that the business was bankrupt and that they personally owed about $300,000. The wife had no idea that they were going bankrupt and that a third of the money they owed was her monthly allowance. They ended up not only filing for bankruptcy but also divorcing.
We’re going to examine potential sources of financing as well as pitfalls that you may find along the way.
Financing Possibilities
Before looking for an investor or loan that is specifically business, consider the most common ways that most businesses are financed:
- Through family and friends.
- Credit cards
- Personal loans
The final item on this list requires that your personal finances be in shape, hence, one more reason to treat your personal finances like a business. In addition, if a personal loan is the most common sense option for you, make sure you apply and acquire the funds before quitting your job. Banks are not going to loan you money if you have no money coming in.
There are two main ways that businesses are financed should you not be able to acquire funds from the above methods: business loans and investors. These articles give specific ways and places that you can look into to find a potential loan or investor for your business:
- The article, “40 Proven Ways to Fund a Small Business” by Angelique O’Rourke examines avenues that you can look into for possible grants and loans with direct links to many of them.
- The Kiplinger article “11 Places to Find Funding for Your Small Business” focuses on different types of business loans with helpful links.
- Fundera’s “How to Find Investors for Your Small Business” covers different ways to find an investor.
- An angel investor is a wealthy individual who is willing to provide startups with funding in exchange for business equity. “7 Angel Websites to Find Investors for Your Startup” has specific places you can search for this type of investor.
Now that you have an idea of ways to finance your fledgling business, let’s discuss pitfalls you may run into when securing loans or investors. “Beware of”……the following:
Beware: Investors
Never forget that investors are looking for a return on their investment or for company growth with the intention of eventually selling. Because of this, inventors can be very sneaky and sleazy. One cautionary tale——
A friend was starting his business and was having his first board meeting with his new investors. The first item on the agenda was to split up the corporation between him and the investors, with the investors getting the majority share in his company. The second motion was the money the investors were going to invest in the company. They voted “not to invest at this time,” and since they had the majority share, there was nothing my friend could do to stop the vote. He was out of business. Use this tale as a lesson to be very careful when going into business deals, and make sure that whatever you agree to is in writing before a vote is taken.
Another thing that investors sometimes do is help you start a business and then take it over once it looks as though it’s going to be successful. How can they do this? By contractually making you have to go to them for money and getting you in a position where you have to give away the majority of your shares to keep the business going.
A few more cautionary notes—-investors may not be there when you really need them. They may pull out of the business when things get tight. And be especially wary of foreign investors in addition to those located in Silicon Valley. A common strategy for these sleazebags is for a large company to invest in a startup and then steal the startup’s technology for themselves. This can happen, even with a Non-Disclosure Agreement (NDA), and the cost and length of a lawsuit can be totally overwhelming for a microbusiness.
A great resource for this is the fantastic book by Rand Fishkin, titled Lost and Founder. If you are on the fence about adding investors and seeking venture capital, read this first.
Really Beware: Loans
Many people start their businesses through personal loans, and I, personally. took out a second mortgage on my house to start my business while I was still employed and my credit was still good. If personal loans are not an option, there are other options listed above. One loan option that was popular was a Small Business Administration (SBA) loan for $35,000, which happens to be just enough for a year’s salary. What often happens is the money runs out, the business fails, and the owner is stuck with $35,000 of additional debt. One thing that you need to figure out is the burn rate of your business, which is how long your business can go without making a profit and burn up its venture capital. To find out more about burn rate, check out this article.
You always hear that, in a business, you have to pay yourself first, but that is not true. You need to pay your bills and have your business build a good reputation first. In fact, my first five-year business plan consisted of “starve, starve, beans and rice, beans and rice, and finally, back to normal.”
Too often, people use SBA loans to purchase things they have no business buying. I had a friend who knew a business owner who got his SBA loan and bought a brand-new Cadillac. Six months later, he was out of business. What’s worse, a few months later, my friend met one of the original business owner’s competitors ….and he, too, bought a brand-new Cadillac with his SBA money and was also out of business within six months. Déjà vu anybody? And another thing….a bad reputation doesn’t die when the business does. It will follow the reprehensible business owner into his next venture. It’s important to not fall into the lure of easy money and use a business loan for its intended purpose: to keep your business afloat until it starts making a profit.
If you have any questions on financing your business or would like to learn more about a specific microbusiness topic, feel free to email me at dave@surefiremicrobusinessguide.com. My book, A Sure-Fire Microbusiness Guide: From Startup to Maintaining a Truly Small Business is now available in both print and downloadable formats.
