April 30, 2008

Startup Financing for Home Based Businesses

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.

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  2. Start Up Money For Home Based Businesses - Lessons From Success
  3. Angel Financing For A Home Based Business
  4. Home-Based Economics
  5. Home-Based Businesses: Use Your Credit
2 Comments | Add a Comment | Tags:, , , , , , , , | Permalink

2 Responses to Startup Financing for Home Based Businesses

  1. Tebo says:

    my God, i thought you were going to chip in with some critical insight at the end there, not leave it with ‘we leave it to you to decide’.

  2. Tom Harnish says:

    How could we possibly offer a “critical insight” for you when we don’t know anything about you or your business and financial needs?

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