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Sunday, February 19, 2017

 

How To Fund A New Business

Funding a new business when you're cash poor


 
The typical entrepreneur is idea rich and cash poor. Like the old adage says, “It takes money to make money.”

Obtaining the money required to get your new business off the ground can be a challenge, but let’s take a look at the numbers...

The average startup cost to become an affiliate marketer is $250, which is a relatively small investment compared to a $30,000 cash outlay required to start a franchise. Plus, affiliates don’t have to pay monthly expenses for advertising, inventory, rent, and payroll.

But, coming up with the money needed to fund a business can be very difficult when you have a mortgage, car loan, and/or a family to support.

Going the traditional route with a bank won’t get you very far, considering they don’t like lending money to a start-up business with no history or assets. But before you allow the bank’s negative view towards start-up businesses to dampen your entrepreneurial spirit, let’s take a personal inventory of your assets. You might actually already have the “wealth” available to fund your new business!

Here are a few possible ways to fund your new business: 

  • Get a part time job (or 2nd job)
  • Borrow against the cash value of your life insurance policy 
  • Use some of the equity in your 401 (k) plan 
  • Borrow some cash from family and/or friends 
  • Take a cash advance from your credit cards 
These are all potential sources for startup business capital. In effect, you become your own bank which gives you control over your money; the very control you wanted in the first place when you decided to be an entrepreneur.

Take a part time job and use the funds for the new business. If you’re still working at your “real job”, and starting the new venture ask yourself realistically if you have the energy to take on a third job.

Just remember that real people can’t work a 60-80 hour work week for very long. The risk of burn out is high, the chances of hurting your health and family relationships with undue stress is also high. In the end you have to ask yourself, are these risks worth it?

If you have a life insurance policy, you might be able to put it to work while you’re still around. While this might sound a bit morbid, if you think about it’ really isn't. A life insurance policy provides money to your spouse and family in the event of your demise.

What many people fail to realize is that you can borrow against the cash value of a life insurance policy and pay it back at a flexible rate, on your terms.

Remember, the 401(k) retirement plan from your previous employer, the monthly statements you diligently filed away that are likely collecting dust? This is another resource for funding your business.

The idea of asking family and friends for a loan might sound easy considering you have a built-in level of trust and comfort. While this is likely true, they may not understand the concept of risk that exists in your new venture.

Think about the dynamics here. If things go well you’re the entrepreneurial hero, but if things go sour, it will put undue stress on the people close to you. Many friends and family relationships end up disintegrating over finances. Ask yourself if this is a risk work taking before you consider turning to family and friends.

Now take a serious look at your credit cards. The same ones you used to buy the computer, dinner, a pair of shoes or a new suit or dress. Credit cards are a great resource to fund your business and get it off the ground.

In Entrepreneur magazine's July 2004 article, “Debt End Ahead”, Jean Burkhart, vice president of Visa business products, said,” Visa estimates that roughly two-thirds of all business purchases made with plastic are still put on personal credit cards.” In this article, Burkhart mentioned that the number of small-business credit card transactions grew by 29 percent last year for Visa.

Maintain control over your finances. Remember that being your own bank doesn’t mean relinquishing control over your money. As a new business owner, keep a close watch on the money you’re borrowing. Plan what you are going to do with the money and when you are going to pay it back.

Many businesses grow fast while the debts grown even faster. That’s not the situation you want to be in. A common complaint for entrepreneurs in this situation is “I didn't have the systems and processes in place to maintain control." 

If you’re going to be a successful entrepreneur, you need to be smart about using your funds and have a plan for expenditures or you'll dig a deep hole for yourself.

Be sure and set a limit for yourself so you know when you should get out in case your business venture is not going well. Don’t borrow more money than you can pay back in a reasonable period of time.
 

About the author:

Colin McDougall is a successful online business entrepreneur. He is always willing to provide guidance to any aspiring entrepreneurs.


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