How To Find Money To Start a Home-based Business

If you’re starting a business and   need money to turn your dreams into reality, you have several options:

  • You can borrow the money you need and incur a debt, a debt you’ll have to repay;
  • You can sell part of your company to investors and exchange equity for the money you need; or
  • You can do both.

How much debt you can take on and how much equity you should sell is a tough decision, because the right mix varies from industry to industry and from business to business. In any case, the decision is often made for you based on what a given source will qualify you for, rather than what you might want.

gold bullion for small business financing

So what kind of financing do you qualify for, and where can you find it?

Debt capital (a loan) is generally cheaper than equity capital (venture funding or angel investment) in the long run, and it’s typically quicker and easier to find. Plus the real advantage to debt financing is that it doesn’t dilute your ownership. The bad news about debt capital is that lenders require regular monthly payments of principal and interest regardless of your profitability. When you’re just cranking up, or if things aren’t going well later, don’t expect a lender to cut you some slack.

Investors on the other hand are, almost by definition, willing to gamble on your success. Early in the life of your company investors usually don’t expect a return on their money, because they’re really hoping for a huge success returning 20x to 30x in three to seven years. Note the emphasis on ‘huge’–if you’re starting a home-based business to basically earn a living you can forget venture capital as a source of start-up funding. An ‘angel’, perhaps, but not a VC. In any event, as owners, investors also share in the risk of failure. They may not require monthly payments, but you can be sure they’ll be checking on your performance to make sure the company is doing what you promised it would.

Incidentally, while the concept of financing your business purely on Other People’s Money or OPM has been widely touted by a number of self-appointed gurus, it rarely works that way in the real world. For one thing, studies show that only about 10-15 percent of companies find someone to invest money in their start-up. (And keep in mind, those statistics are based on fast growing manufacturing and service companies. You can be sure that the chance of a slow-growth internet-based retail or distribution company being financed by an investor is much lower.) Which leaves lenders–and lenders shy away from what they call an “undercapitalized” company, one where the owners have too little of their own money at risk. Your investment in your company is a lender’s best guarantee of your commitment through thick and thin.

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, with equity capital you may grow larger or you may grow more quickly, but you’ll have to share the wealth and some control with investors. If the thought of sharing ownership and control bothers you, but your company really needs the money, you have to ask yourself: “Would I rather own 1% of General Motors, or 100% of I-Wanna-Be-General-Motors?” It’s an individual decision that has to be weighed against the possibilities and potential trade-offs.

Secret: This is one you probably don’t want to hear, but the fact is you’re probably better off to struggle through start-up on your own nickel, with money from family or friends, maxed-out credit cards, or perhaps with some money from a bank if you can qualify. If you can put a couple of years of success under your belt before you approach lenders or investors, you’ll be able to attract more money, at a lower cost, than you would’ve at start-up.

In the end, the best approach will be one that fits you and your company’s needs, wants, personality, and financial realities. And if you haven’t already gathered, by financial realities we mean the Golden Rule of Finance 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.

3 Comments | Add a Comment | Tags:, , , , , , | Permalink

3 Responses to How To Find Money To Start a Home-based Business

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.