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By Laura Rowley
Myth 1: It takes money to make money.
It doesn’t take money to make money… it takes passion and discipline. Not having money is sometimes an advantage – it gets you focused on sales, on bringing cash into the business. There are thousands of examples of people who started multi-million-dollar businesses with little or no start-up capital – from Madam C.J. Walker, who built a fortune in hair-care products in the early 1900s to Fred Deluca, the founder of Subway, who started with $1,000. Financially, there a several avenues to help fund your start-up:
Self-funding
-Eliminate any non-essential spending (food, clothing and shelter – move home if you have to) and put your savings and current income into the business.
-Borrow against the house: Home equity loans are a little harder to get than they used to be, but the interest rates are still lower than credit cards (for people with good credit, around 7 percent).
-Credit cards: If you added up the credit limits on all your credit cards combined, how much cash could you access? Keep in mind this will hurt your credit score and you may be paying between 15 and 30 percent interest.
-Borrowing against the money in your 401(k). This may be a strategy for someone who works full time and is launching their business on the side, but there are many restrictions and risks you must keep in mind.
Loans from Family and Friends:
Although these are folks who trust you, you want to legally formalize the loan with everything from the terms to the timing. Talk about your investors’ expectations upfront, outlining the worst case scenarios: What happens if you default on the loan? Clarify that the money toward your business doesn’t the investors a vote in how you run it.
-Get a Promissory note, and set up a repayment schedule.
-Online Family Lending - Use a lending network designed for inter-family loans, such as CircleLending.com..
-Peer-to-peer Lending: Several websites now make it much easier to find an investor who will back your business. Check out prosper.com, lendingclub.com and zopa.com.
Other Loans
-SBA Loans – the U.S. Small Business Administration makes loans through local banks and agencies; you can use these loans to buy equipment, inventory, furniture, supplies and more.
-Line-of-credit loans: These short-term loans let you access a specified amount of money that’s deposited into your business checking account on an as-needed basis. You pay interest on the amount that’s loaned to you. Line-of-credit loans can be used to buy inventory and pay operating costs for working capital, among other things, but not to buy real estate or equipment.
-A Revolving Line of Credit: A lender offers a certain amount of money to a borrower; as the person repays it, they can borrow it again.
-Angel Investors: This is where to turn when you have gone through your own funds and exhausted investment possibilities with family and friends. These are high net worth investors who are willing to invest their own money in your business. I can discuss what they typically look for. Start with the Angel Capital Education Foundation at angelcapitaleducation.org, which has a listing of angel groups.
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