The following is a guest post from Neal Frankle, who is a Certified Financial Planner in Los Angeles. He also is the owner of Wealth Pilgrim – one of my favourite personal finance blogs.
Best way to finance your very small side business
People launch their own business for a variety of reasons. Everyone likes to have a few more shekels in their pockets of course but there are plenty of other motivations. Having your own business, no matter how big or small allows you to be creative in a way few other activities can. Finally, being in business for yourself (even if it’s just a weekend job that turn into a business) is a great confidence builder.
When you create something from nothing and see that it is productive and profitable, it’s just a wonderful feeling unlike any other in my experience.
But how can you launch a business if you don’t have much money to spare? Before you ask that question, ask how much does it cost to start your business? It may be much less than you think. My strong preference is to start very small and only invest in the business once you see profits coming in (not just revenue).
But even if you do start small you may need some working capital that is simply beyond your reach. Here are 5 ways to fund your business that you may not have considered in the past:
1. Owner/Vendor Financed
If you are buying an existing business or need a little equipment just to get off the launching pad, have the seller (of the business or the equipment) finance it. Don’t be shy about asking for them to invest in the business this way. If the people who are selling the business or equipment tell you how this is a once-in-a-lifetime opportunity, turn the tables on them. If they really believe this business or equipment is so great, let them put their money where there mouth is.
You’ll probably still have to come up with some amount for a down payment but it’s very common for sellers and vendors to finance buyers. Take advantage of that. And in this kind of economy, make sure you bargain hard with the sellers and don’t pay exorbitant interest rates.
2. Family and Friends
Not long ago I read that 42% of the money that finances small business comes from family of the company’s founders. An additional 40% comes from friends and neighbors! This means that your family and friends are ready and willing to help you. Just make sure you have a solid business plan and once you do, approach them with a positive attitude.
3. Untapped Assets
How badly do you want to have a small side business? Are you willing to go through your house and sell the stuff that’s been laying around collecting dust? I must admit, I’m really lazy when it comes to using Ebay and Craigslist. Not only that, I’m intimidated by the process. But I recently decided it was time to get rid of a bunch of junk and Craigslist helped move the inventory pronto. I found it easy, fast and kind of fun. By going through this process you’ll have a more clear living environment and more bucks in the bank with which to start your business.
If you want to really leverage this idea, why not offer to go through your friends and family’s homes and offer them the same service? Get rid of their junk and split the profits. Heck, that could be your side business right there!
4. Financial Institutions
If after you take these steps you still need money there a few institutions you can approach. I’m not a big fan of using credit card debt to finance your business because it can be so darn expensive. A better way to go is to approach a peer-to-peer lenders like Lending Club and Prosper. Peer-to-peer lenders match people like you who need money with people who have money to loan. If you have good credit, you’ll get your small business financing much cheaper than you would if you use your credit card. It’s a win-win and an option you should consider.
A final suggestion is to partner with another person who has the cash you lack. I’m not a big fan of this approach. While it will be easier to get the money quickly, you might be inviting trouble down the road.
My experience tells me that it’s very difficult to find the right partner over the long-run. Just the same, under the right circumstance, this could be a perfect way to get your company off the ground. Just make sure that if you do go this way, you draft a very clear partnership agreement. Even though you may not technically need one, it’s always smart to have all the terms and conditions agreed on beforehand.
Having mentioned these 5 good places to find funding, you should probably avoid using your home or retirement accounts to fund your business. If you do tap those assets you will be taking on much greater risk. If you review the 5 areas above you will see that you are either creating the investment capital by selling assets or sharing the risk with other people. But if you risk your home and/or retirement accounts, you are putting a much higher percentage of your net-worth into the business. I’m not a fan of going this route.
Regardless of how you fund your business, make sure you have a solid business plan. That way, you’ll know how much you can afford to pay for borrowed funds – and whether or not it makes sense to do so.
How did you get the money to start your small business?