If you’re starting or growing a small business you undoubtedly need money to turn your dreams into reality.

You have two basic options:

• You can borrow the money and incur a debt, a debt you’ll have to repay; and/or

• You can raise money from investors (called equity capital) by trading their money for some ownership. They won’t want any fixed payments, but they will want to earn a good return on their investment in a short period.

The right mix of debt and equity varies from industry to industry and from business to business, but here are the basics about each option:

Small business debt financing typically comes from credit cards, home equity loans, banks, government loan programs, and private lenders (in that order). A loan is generally cheaper than giving away part of your company in the long run, and it’s usually easier to obtain. The primary advantages of debt financing are that you don’t have to share your financial success with anyone, and you don’t have to share control. There’s a reason we’re called independent business owners! The disadvantage of debt is that lenders require regular monthly payments of principal and interest regardless of your profitability–just like your home mortgage lender. When you’re just cranking up, or if things aren’t going well later, don’t expect a lender to cut you some slack.

The most common sources of equity financing are friendly investors–people who know you, love you, or like you; angels–individuals who invest in businesses because they believe they can make good money at it; and venture capitalists–organized investment funds run by seasoned investment professionals. Selling stock on the open market is another way of raising equity, but it’s prohibitively expensive and an unrealistic alternative for all but a handful of fast growing small businesses. Unlike lenders, investors are willing to gamble on your success. They don’t expect an immediate return on their money, because they are betting on a huge success down the road. As owners, investors also share in the risk of failure, a common fate for fast growing businesses. To make up for risks they take, professional investors only bet on opportunities they feel can return 20 to 30 times their money in five to seven years. So, if you’re starting a small business to basically earn a living, you can forget venture funds as a source of funding–an ‘angel’, maybe; friendly money, perhaps; but not venture capital.

The obnoxious, dollar-sign clad, self-appointed guru who touts free government grants on TV is misleading at best. “Money for nothing” made a good song title, but entrepreneurs still need to sing for their supper. And while there are some government assistance programs that target women and minority businesses, that assistance very seldom involves coughing up cash.

To summarize, then, if you finance your company with debt and you’re successful, everything you make is yours after you pay off the debt. On the other hand, equity capital may allow you to grow larger or more quickly, but you’ll have to share the wealth and some control with investors. That said, if the concept of sharing bothers you, consider the words of the richest man in the world, Warren Buffet: “It’s better to have a part interest in the Hope Diamond than to own all of a rhinestone.”

Almost 30 years of experience running small companies and helping entrepreneurs raise money leads me to the following conclusion. If you bootstrap your initial years with credit cards, home equity loans, money from friendly sources, and perhaps a small bank loan, you’ll be happier and more successful in the long run. Once you have a couple of years of success under your belt, you’ll be able to attract more money, at a lower cost–both in terms of interest rates and the amount of control you lose to investors–than if you’d reached out at start-up.

In the end, whether you finance your business with debt or equity the solution has to be one that fits your company’s as well as your own needs, wants, personality, and financial realities. By financial realities I mean the Golden Rule applies: Those who have the gold rule.

We’ve compiled everything we’ve learned from 25+ years as a banker, investor, venture capitalist, and entrepreneur into an all new and up-to-date eBook. Finding Money—Secrets of a Former Banker includes information about small business loans, raising money from angels and other private investors, venture capital, government loans, grants, preparing a business plan or financing application, and other money management advice. Finding Money is available for immediate download. Order your copy today.

We don’t want to be all doom and gloom here but if you’re looking for a job that will let you work from home , or if you’re thinking about starting a home based business , or launching a freelance career, you need to consider how the state of the economy fits into your plans. As we said a couple of days ago, the future ain’t what it used to be .

Like the proverbial frog in a sauce pan, many people haven’t noticed that our economy is in hot water because the bubbles have taken some time to rise to the surface. Fact is though, the dollar is in a world of hurt, our trade deficit is growing, and a recession is on the horizon—if not already here. The consumer boom we’ve enjoyed for the past five years has been largely financed with credit and that chapter is about to end.

Face it, people use credit to plug the gap between their lifestyle and their income. In fact, household debt has been growing by $4 billion every day for years. Americans are now “saving” a net negative 0.4% of their disposable income. Simply put, we’re spending more than we make. And we’re talkin’ we the people here, not government—that’s aother whole story.

The real estate crisis has clobbered the banks in a ‘what goes around comes around’ sorta way, and it’s making stock markets nervous although so far, inexplicably, they continue to climb. The mortgage crisis will soon spread to credit card providers, we suspect, and then to car manufacturers, furniture makers, appliance sales, and others that depend on consumer credit.

Meanwhile, believe it or not, the Federal Reserve has encouraged banks to go on taking risks, and has been adding cash into the banking system for about 6 months so that consumers can keep on spending.

Now, if our economy were doing well in foreign markets this all might not be so bad; but it isn’t, and hasn’t been for a long time. The dollar’s weakness makes imports into the U.S. more expensive and makes our exports cheaper in foreign markets, so you’d think we’d be doing great. But we aren’t. Manufacturers are finding it hard to sell their products, and the trade deficit has continued to grow. We imported $62 billion more than we exported in February alone, an increase of 6% in just one month. Gulp.

Still not convinced we have a problem? Consider these facts from Is America Falling Off the Flat Earth?

• The US share of the world’s leading-edge semiconductor manufacturing capacity dropped from 36% to 11% in the past 7 years.

• Chemical companies closed 70 facilities in the United States in 2004 and were in the process of closing 40 more the following year. Of the 120 new plants costing over $1 billion each that were under construction at that time, 50 were in China and one was in the United States.

• The U.S. Big Three automakers announced the closing of 26 plants in the United States over the next several years, while Japan-based companies are opening four new plants in the United States between 2006 and 2008.

• In Business Week’s ranking of the world’s information-technology companies, only one of the top 10 is based in the United States.

• Nearly 60% of the patents filed with the US Patent and Trademark Office in the field of information technology now originate in Asia.

• Once-mighty Ford and General Motors both have junk-bond ratings, and each has laid off over one-third of its dwindling North American workforce in the past 5 years alone.

• Toyota brought to an end the notion of the U.S. Big Three automakers when it sold more vehicles in the United States than Chrysler, and the next year ended General Motors’ 75-year reign as the world’s largest auto manufacturer.

• Only one of the 25 largest initial public offerings last year took place on American exchanges.

• China is on track to build 108 new airports between 2005 and 2010, including the world’s largest. The United States, in spite of stifling congestion, has built only one major airport in the last third of a century.

• Low-wage firms, such as Wal-Mart and McDonald’s, created 44% of the new jobs in America during one recent period—a period during which high-wage firms produced only 29% of the new jobs.

• In 2000, the number of foreign students studying physical sciences and engineering in U.S. graduate schools surpassed, for the first time, the number of U.S. students.

• The Los Angeles Times reports that in the past 16 years two high-rise buildings were constructed in Los Angeles as the city executed its accelerated urban-renewal plan. In the past 10 years, 5,000 were built in Shanghai.

• Some foreign universities are now conducting their engineering and business classes in English to promote recruitment of faculty and students and simplify access to technical information. In contrast, the working language in the back halls of many U.S. engineering schools is Chinese.

• The United States is falling relative to its economic competitors in broadband Internet access. As recently as 2000 it was in first place; now it ranks 16th in the fraction of citizens having broadband connections and 61st in the use of mobile telephony per capita. South Korea has nearly twice the broadband penetration (subscribers per capita) of the United States.

• Toyota now has over 5 times the market capitalization of General Motors and Ford combined.

• The United States ranks 17th among nations in high-school graduation rate and 14th in college graduation rate.

• Foreigners finance about two-thirds of US domestic investment, compared with about one-fifteenth a decade ago.

• China has supplanted the United States as the world’s number 1 high-technology exporter.

• The German firm that a decade ago purchased one of America’s Big Three automobile makers, Chrysler, for $36 billion decided after 9 years that it didn’t want the company after all and in effect paid nearly $700 million to get someone else to take it away (along with its pension liability).

• Of the new R&D sites planned for construction in the next 3 years by the 177 companies queried in one recent survey, 77% are to be built in China or India, often using US corporate financing.

Okay. Now you’re convinced. The point is that if we realize it, we can plan appropriately. If there’s anything America’s entrepreneurs have proven, it’s resilience. Good times and bad, there is opportunity. The important thing is to have your eyes open not just croak blindly along until one day you wake up and find it’s too late to do anything about your predicament.

What businesses and opportunities do you see in a declining economy? Do you think our economic woes will foster or impede the growth of work-at-home jobs? We’d love to hear from you.

We’ve compiled everything we’ve learned from 25+ years as a banker, investor, venture capitalist, and entrepreneur into an all new and up-to-date eBook. Finding Money—Secrets of a Former Banker includes information about small business loans, raising money from angels and other private investors, venture capital, government loans, grants, preparing a business plan or financing application, and other money management advice. Finding Money is available for immediate download. Order your copy today.

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Your taxes were due yesterday, so now is a good time to think again about your home-based business bottom line.

A few years back we needed a new accountant for our air tour business. One we talked to, a former I.R.S. agent, said to us, “Some business owners want to sleep well, others want to eat well. Which are you?”

What he was telling us was that we were talking to the wrong guy if we wanted to cheat on our taxes. We knew that if we wanted to get a good night’s sleep on the eve of an I.R.S. audit, we’d come to the right place. In the ‘been there, done that’ sense we knew the I.R.S. philosophy was ‘guilty until you can prove yourself innocent,’ and a good accountant with insider knowledge was worth his weight in gold–maybe literally.

But here’s a problem an accountant can’t fix: It’s all too easy to succumb to the temptation of understating your income, particularly if you run a cash business. Likewise, it’s tempting to deduct that week-long trip to Hawaii, even though you only spent one day doing anything that looked like work. A good accountant will figure out what you’re doing in either case, and a really good one will advise against it.

But if I.R.S. audit worries aren’t enough to keep you up at night, if you’ve been cheating, consider that understating your home based business profit will handicap your ability to raise money for the company. Lenders and investors won’t be amused when you show them your tax reports and than add, with a wink, that they really don’t show all your income.  Dishonest business practices, no matter how good the real numbers may look, don’t make you a good investment.

In addition, while you may eat well in the short run, when it comes time to sell your business, you’ll find your plate far from full. That’s because businesses typically sell for a multiple of net income. So, if a home based businesses like yours sell for five times net, every understated dollar of profit will cost you five dollars when you sell.

Nighty night. Sleep tight. Don’t let the Fed bugs bite.

We’ve compiled everything we’ve learned from 25+ years as a banker, investor, venture capitalist, and entrepreneur into an all new and up-to-date eBook. Finding Money—Secrets of a Former Banker includes information about small business loans, raising money from angels and other private investors, venture capital, government loans, grants, preparing a business plan or financing application, and other money management advice. Finding Money is available for immediate download. Order your copy today.

IRS Publication 334, Tax Guide for Small Businesses, isn’t exactly light reading, but it does provide the key tax information you need to know if you run a home-based business.

To claim business expenses for use of your home you have to use the business part of your home exclusively for your business on a regular basis. It has to be your principal place of business–where you meet or deal with patients, clients, or customers in the normal course of your business, or a separate structure (not attached to your home) you use in connection with your business.

You won’t meet the exclusive use test if you use part of your home to store inventory or product samples or as a daycare facility. Your home office will qualify as your principal place of business if you use it exclusively and regularly for the administrative or management activities, and if you have no other fixed location where you do that. You do not meet the regular use test if you use the area for business only occasionally or incidentally, even if you do not use that area for any other purpose.

If you make a profit, you can deduct all of your business expenses related to the use of your home, but if you don’t make money your deduction for certain expenses for the business use of your home are limited, so be sure to check exactly what you can and can’t deduct.

IRS Publication 535 explains under what circumstances the following are deductible:

• Advertising
• Clean-fuel vehicles and refueling property
• Donations to business organizations
• Education expenses
• Environmental cleanup costs
• Impairment-related expenses
• Interview expense allowances
• Licenses and regulatory fees
• Moving machinery
• Outplacement services
• Penalties and fines you pay for late performance or nonperformance of a contract
• Repairs that keep your property in normal efficient operating condition
• Repayments of income
• Subscriptions to trade or professional publications
• Supplies and materials
• Utilities

Typically you can’t deduct the following as home-based business expenses.

• Bribes and kickbacks
• Charitable contributions
• Demolition expenses or losses
• Dues to business, social, athletic, luncheon, sporting, airline, and hotel clubs
• Lobbying expenses
• Penalties and fines you pay to a governmental agency or instrumentality because you broke the law
• Political contributions
• Repairs that add to the value of your property or significantly increase its life

Are we having fun yet?

We’ve compiled everything we’ve learned from 25+ years as a banker, investor, venture capitalist, and entrepreneur into an all new and up-to-date eBook. Finding Money—Secrets of a Former Banker includes information about small business loans, raising money from angels and other private investors, venture capital, government loans, grants, preparing a business plan or financing application, and other money management advice. Finding Money is available for immediate download. Order your copy today.

If you’re trying to find money for a home-based business, venture capital may come to mind, but a few notable garage start-ups notwithstanding, most home businesses will never find its way into a venture fund’s radar.

In general, venture capitalists are only interested in companies that offer:

Huge Market Potential
Venture funded companies are expected to be able to grow to $30, $50 or even $100 Million in five to seven years. This means that the industry has to be big enough to support such growth. But many venture proposals fail to adequately convince investors of the market potential while others naively project that they’ll capture 10%, 20% and even 50% market share in a very short period. When you’re projecting potential market share, consider the fact that with all its marketing might Apple’s personal computer market share is less than 9%.

Proprietary Products or Services
Companies with proprietary products or services often enjoy a desirable “unfair” competitive advantage by virtue of the exclusivity of their products. Patents, trademarks, copyrights, exclusive distributorships, or other special rights may protect a company’s unique position in the market. Sometimes, a non-protected product or service with an exceptional head-start on potential competition can fit this criteria, as well. The point is that the company must have some significant advantage over existing or potential competitors so it can achieve and maintain a dominant position in its industry.

Proven Management Talent
Management is the most important element in a venture capitalist’s decision to invest in your company. Are you, and the others in your company, capable of building a $50 Million business? Have you managed similar growth in the past? Do you have, or are you able to hire, the top people in your field? Venture capitalists will want to see real depth.

Extraordinary Returns
Venture capitalists are looking for returns of 35-50% per year. A 50% return means that if they invest $1 Million they want to wind up $5 Million in four years. Obviously most businesses, even the high-flyers, won’t achieve that kind of return through profits. In fact, most will lose money in the early years. Therefore, you have to be willing and able to sell the company or go public in three to seven years.

In short, and this is the naked truth, a home based business is an extremely unlikely candidate for venture funding. But times, they are a changin’, so if you have a unique software product or a web-based solution to something that frustrates millions of people, you wouldn’t be the first billionaire who can trace his beginnings to a spare bedroom.

We’ve compiled everything we’ve learned from 25+ years as a banker, investor, venture capitalist, and entrepreneur into an all new and up-to-date eBook. Finding Money—Secrets of a Former Banker includes information about small business loans, raising money from angels and other private investors, venture capital, government loans, grants, preparing a business plan or financing application, and other money management advice. Finding Money is available for immediate download. Order your copy today.