Financing The Start Of Your 50+ Business
Even with the most disciplined cost control and effective collection of money your business can run short of cash. As a matter of fact, this is a fairly constant situation when you are growing your business.
To provide the capital to launch and grow three businesses over the past twenty years, two of them after I turned 50, I’ve used every one of the financing techniques described in this blog. You benefit from my personal experience.
Finding Cash To Launch Your Business
This period includes the time from the day you crystallize your business concept through the first six-twelve months after you officially open for business. You can look at your business during this phase as a "money sponge"–everything you do seems to require cash.
You can feel very conflicted during this period regarding your money. You have read or been told that you need to conserve your cash in the early days of your business, and yet there seems to be so many expenditures you must make. The key question to answer is: Can you successfully pursue your marketing strategy while keeping tight control on your available cash? If not, you will find yourself visiting the bank for a cash advance more often than you may wish.
Sources of Start-Up Capital
The is probably the most commonly used source of start-up capital, as it should be. Be realistic
— why should anyone else take a financial risk on you until you have proved that you can make a profit with your own money?
The ideal scenario would be for the new business owner to have planned ahead enough that she accumulates all of the seed money she needs before she quits her job and opens for business. The reality is that the personality type that will undertake a new business launch is also characterized by impatience. This often leads to fudging on the amount of money you start with.
Your family’s active help can make the money go further by pitching in on necessary tasks, such as typing billing, stuffing envelopes, answering the phone, doing the bookkeeping, passing out flyers, etc.
If you enjoy good personal credit, you will receive at least several offers of "cut rate" credit cards. A common technique is to offer you a "special introductory interest rate" of between 6.5% and 8.0%. If you read the financial pages in the newspaper, you know that this rate is below the current prime rate.
So what is the catch? The rate is usually only good for six months, at which time it typically rises to 6.5% over prime (around 15%). Obviously if you plan to carry a significant balance more than six months, you may want to reexamine the use of these supposed special deals.
It is, however, very convenient to be able to walk into a bank and walk out with $5,000 in cash, without having to deal with a bank officer. We recommend that you apply for at least one of these reduced-rate cards and put it away safely until you find your business in a first-year emergency or until a very certain selling opportunity comes along.
This source of capital is probably the second or third most-widely used source of seed money.
If you have thought out your business idea even a little you can usually approach at least one family member for a $1000-$3000 loan. We call this "love money" because they lend it based more on their love for you than from a thorough review of your business plan. Dollar amounts above this level are more difficult to obtain without some more formal commitment, such as a promissory note. If you fall behind in paying, don’t be surprised if at Thanksgiving dinner you are approached by the lender for a "heart to heart" talk.
One key guideline to follow: Don’t borrow from a family member who can’t afford to lose the money. Unfortunately, you probably only have a 60% chance of paying the money back so default is not uncommon.
Home Equity Loans
During the 1990’s, borrowing money on the equity in your house was a popular way to finance a business launch. The most important fact to remember with this type of loan is: If you default, you don’t just walk away and chalk it up to experience. The bank will be on your trail fast! They usually don’t really want to have to sell your house, so they will press you to agree to a repayment schedule, which will often require that you find a JOB very quickly.
Be aware: Apply for a home equity before you quit or lose your job, unless your spouse brings in a substantial income.
Although it is less frequent today than it was in the ’70’s and ’80’s, many people today own a type of insurance known as whole life. This policy is a combination of life insurance and savings, as part of your premium goes into a pool which is invested by the insurance company. After the first 3-4 years, the dollar value of the savings portion, known in insurance parlance as "cash value" starts to increase fairly dramatically. For example, on a seven-year old $100,000 face value whole life policy, the cash value is $8,000 or more. You have the right to borrow all of the available cash value (total value less any previous loans) at very attractive interest rates–averaging 8%. You are charged interest only, once per year. If you die before repaying, the loan amount is deducted from the death proceeds.
Barter is defined as "to trade without the exchange of money." The key to the exchange is a method for acceptably valuing each parties offer. This is where barter exchanges come in. These are businesses whose business is to introduce traders to each other, establish fair dollar values and record the transaction for the IRS.
Active traders use the barter exchange’s computer to keep track of how many barter "points" they have accumulated and how many points it takes to buy certain products and services. A typical barter exchange might start with a carpet installer offering $ 1000 of installed carpet in return for $ 1 000 in oil changes which are traded to a trucking company, for $ 1 000 in trucking which is then traded by the carpet installer to a printer who offers $ 1 000 in printing.
As a new business owner, you can create your own barter exchanges simply by approaching suppliers of goods and services you need and don’t want to pay cash for.
Informal Investment Groups
Some very successful business concepts derived their initial funding by putting together a group of private investors among the founder’s friends and acquaintances, We are personally familiar with a start-up that was funded by obtaining a $ 1,000 investment from each of 25 investors, all members of the same softball league, who bought shares of stock in the new corporation with the clear understanding that they could lose all of the money, but that they would enjoy some very fun stockholder meetings.
If you desire to explore this option, we suggest that you consult first with a small business attorney experienced in equity investments for new corporations.