Advice on Financing Your Business Idea - The Money Chase

If You Believe in Yourself, Invest in Yourself

If you've had your business idea for a while, maybe you've been putting a little extra away each month, saving for the day you could strike out on your own. If you've got personal savings to invest in your new business, great, but not everyone does. Consider these alternatives:

Do you have any assets that you could sell--a second car, a vacation property, jewelry or home furnishings? Can you lower your monthly expenses and free up more cash by refinancing your home? Or, consider borrowing against your home, a scary but often practical option. You're not necessarily putting your house up as collateral, you're borrowing against the equity you already have in the house. Many first-time entrepreneurs are reluctant to take this risk, but you might not have the luxury of being so selective, says Patti Greene, dean of the undergraduate school at Babson College. Babson was recently ranked the top school in the country for entrepreneurship and Greene, a leading authority on access to capital, is co-author of the new book Clearing the Hurdles : Women Building Growth Businesses.

"If you want to succeed, you have to be willing to take some risks," she says. "And if you don't have enough faith in your business to put your own money in, why in the world would somebody else put their money in?" she asks.

Investing your own money now will become important down the road if you plan to seek additional capital from a bank or other lender. While Moore was rejected by one bank because it didn't like that she was foregoing a salary and investing her own money, many loan programs require the business owner invest her own money, and lenders tend to look more favorably at an applicant who has a significant personal investment in the business.

The Importance of Friends and Family

After you've exhausted your own resources, it's time to turn to your family and friends. A $2,000 gift from a loved one or a $5,000 loan from a friend could be enough to get you started.

"People will invest in you because of your relationship with them and their belief that you will work hard and do a good job," Johns Martin says. "When you're a new entrepreneur, it's very difficult for someone who does not know you to make that leap of faith. That's why you need to first go to people with whom you have an existing relationship--your friends, family or people you've worked with."

In these cases, it's usually best to accept a loan rather than give up equity. (Do you really want your mother having a say in how you run your business?) And even if the money comes from your mother or dearest friend, it's best to have a written agreement. If your mother is offended, simply tell her it's something your lawyer recommended and you're sorry, but you don't have a choice. A simple written agreement can save feelings and money down the road. When your company makes $20 million, is your uncle Leo going to claim his small loan makes him part owner?

Charge!

When it comes to your personal finances, you've been told over and over to keep your credit card debt to a minimum. Always pay more than the minimum and don't shift balances from card to card, you'll only end up paying lots of unnecessary interest, financial advisors say. But when it comes to financing your business, credit cards can be a girl's best friend.

A 2002 NAWBO survey found that credit and charge cards are the top source of businesses financing. In fact, 65 percent of NAWBO members reported using credit cards, up from 57 percent in 1998 and 51 percent in 1994. A credit card (or two) with a $10,000 limit could provide you with enough working capital to purchase equipment or furniture, pay for your first marketing campaign, or, as in Madzel's case, make payroll in an emergency.

"There are times in our economy when a credit card offers the lowest available interest rate," Greene says. "If you use credit cards, you need to pay close attention to the rates and manage the debt very carefully, but it shouldn't be discounted as a viable financing option. It's not necessarily more expensive than other types of loans."

In 1987, when Malynda Hawes Madzel started Custom Telemarketing Services from her basement, she didn't even have a credit card in her own name. But Madzel knew she had a talent for telemarketing and was sure her business-to-business telemarketing firm could succeed. After being rejected for a business loan, Madzel applied for a credit card through her local chamber of commerce and used it, along with personal savings, to cover startup costs and even payroll later on.

Ten years later, Custom Telemarketing Services was booming, with as many as 35 employees and 20 clients at one time. Yet Madzel had done it all without a single commercial loan or professional investment. It wasn't until 1996 that she got her first business line of credit for $25,000. Since then, the business has continued to grow and thrive and Madzel has been recognized many-times over as an innovative entrepreneur.

To keep your businesses expenses separate from personal expenses, be sure, as Madzel did, to open a separate credit or charge card just for business purposes.

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