I never even looked at the price, because $6 was the most money in the world to me.
My older sister Barbara was kind enough to stand in line with me at K-Mart, and thank God she did, because the album was actually $7 and some change.
I was panicked as the clerk awkwardly looked down at me with my six crumpled dollar bills.
Luckily, Barbara had a couple of bucks on her and she took pity on me.
And, she claimed 20% ownership of that Thriller album.
Unfortunately, this is also how many folks try to fund their full-time business.
But they're not six years old with a smarter thirteen-year-old waiting in the wings.
After 14 years of coaching small business owners and start-ups, I have found these to be the most common ways to fund that full-time business you are dreaming of.
BEST WAYS
Personal savings/resources
This is the most common and smartest way that people fund their full-time business.
This takes longer and requires the most discipline, however, it is the most secure and successful.
Determine what your start-up costs and working capital needs are now and simply compare it to what you have access to.
Whatever you are short is the amount you have to save.
It’s not rocket science, but you wouldn’t believe the number of people that find that exercise difficult.
And yes, I count a home equity line as part of your savings but be careful because that is also one of your most precious assets.
Bank and/or Small Business Administration (SBA) loan
This one is simple to understand, but not easy to do.
A lending institution wants you to have capital, collateral, and cash flow to loan you money.
For example, if you want to start a landscaping business and your project you need $100,000 for equipment and working capital, the breakdown for qualifying looks like this:
Capital is around 20%-25% of the total cost. In this case you would need $25,000 of cash on your own.
Collateral that can cover the other $75,000. They may be willing to use some of the equipment you are purchasing, but most likely they want a fixed asset that appreciates, i.e. your home.
Then you need cash flow to pay for the new loan. And if this business is less than two years old, the bank won’t count the income from the business. This is one of the reasons I usually advise people to start their business on the side, before launching full-time.
Then there’s the matter of having good credit, showing how you will spend the money, a business plan, etc.
So if you don’t have the full $25,000, don’t have that much collateral, and you are short the monthly income to pay for a new loan, you may need to Plan B in this case. That might look like buying a zero turn mower on your own and start mowing yards during the evenings and weekends first.
An SBA loan is not that much different from a traditional bank loan. The same rules apply with capital, collateral, and cash flow, however, the SBA will potentially guarantee the repayment of up to 85% of the loan to the bank if you are unable to repay the loan.
This doesn’t make the loan necessarily that much easier to obtain, but it incentivizes banks to make those loans.
NOT THE BEST WAYS
Family/friends
This one is not my favorite.
Your family and friends have heard you go on and on about how you are ready to start your own business and some of them are eager to get in on the action.
I’m not saying this can’t work out, but it rarely does.
Those silent partners that want to see you succeed usually become passive aggressive advisors that want their money back sooner rather than later and with plenty of interest.
Assuming you do borrow money from family or friends, make sure you have a written agreement in place for the terms and interest rate.
When MeMaw said, “honey, you just pay it back whenever you can”, she really meant starting next month with a modest 5% interest rate. She just assumed you knew that though.
Credit cards
This one is a straight up no-no.
I don’t want to go all Dave Ramsey on you, but starting a full-time business has enough obstacles.
If you are in such a tight financial spot that you can’t save any cash and the bank says your income doesn’t support a loan, then you might need to take care of those issues first.
Adding a high interest loan (which is what a credit card is) won’t make your financial situation better, but it will definitely make it worse.
VIRTUALLY NON-EXISTENT WAYS
Investors
I blame Shark Tank for the emails I get asking about local investors.
And I do love Shark Tank, but investors like that (venture capitalists or angel investors) are usually looking for something in the tech, medical, or even music industries.
Also, they usually want to invest in someone that has experience in raising capital and this industry.
That leaves out a big majority of traditional businesses.
Investors for the rest of us will usually be someone you know that believes in your business idea.
If you go that route, I’d suggest working with an attorney to create a term sheet, which is a document outlining the business agreement, establishing how the investor will be paid back.
But keep in mind that you are taking on someone that will have ownership and will eventually want some say so in your business too.
Crowdfunding
It’s not fair for me to say crowdfunding is non-existent for small business funding, because the evidence proves otherwise on their platforms.
I just haven’t met anyone that has been successful with it.
Below are some options and there are several more:
Kickstarter
Indiegogo
Fundable
,
Grants
While there has been a boom of grants, advances, and forgivable loans over the past year geared toward helping people recover from the pandemic, I’ve yet in my 14 year career at the TSBDC to see a legitimate grant for someone starting a small business.
In reality, getting a small business grant to start or expand your business isn't very likely.
As for me, that Thriller album is long gone and I still owe Barbara a couple of bucks.
So, maybe that was like a funding business start-up :).
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