Here are ten ways that entrepreneurs get the money they need to finance a start-up or growth.
1. Bootstrapping. Sad and frustrating although it may seem, bootstrapping is very likely your best financing option. While it means growth will be slower than if you had cash on hand, you will be more careful how you spend it and more critical of the results. You will make your mistakes inexpensively and learn by doing. You will owe no one, keep all your equity, and lose none of your friends. I managed to build my first million-dollar business on this basis in about three years. While the hours were long and the effort hard, the satisfaction of doing it and owing no one was tremendous.
2. Credit Cards. I have done this twice and gotten away with it both times, once to the tune of $127,000 spread over nine credit cards. I do not advise you do this. The downside is potentially devastating, ruining your credit for seven years if you go bankrupt.
3. Grants. It’s possible to get government, state, or local government grants to fund some or all of your business. They come in every shape and size depending on your geographical location and personal situation. The local SCORE, SBDC, or government pages of the Internet are a good place to start looking. You will, of course, need a business plan.
4. Business Loan. There is a wonderful plaque in the Ferrari museum in Modena, Italy that tells of Enzo Ferrari’s dream: You are very unlikely to be so lucky because banks as a rule really do only lend money to people who have money.
5. Home equity loan. I have used this strategy on a number of occasions, most recently to pay cash for an office building, thus really just trading one equity position for another. Using equity to trade for real estate that can be turned back into cash is one thing. Using it for cash flow is dangerous.
6. Loans from friends or family. Securing loans from friends and family is usually not that hard. In fact you may be surprised how willing people are to help a solid idea backed by a written business plan. The problems only start if the plan doesn’t work. Remember, 95% of all first-time small businesses fold in the first few years. When people lose money, friendships get strained and often break entirely. Proceed with extreme caution.
7. Equity partners. Giving up equity means giving up control. Even minority partners can sue you at any time to get their money back. It can be easy to get equity partners; it can bring talent as sell as cash. But the downside is huge if it doesn’t work out.
8. Sellers. There are people looking to sell their businesses in just about every city in the world. For one reason or another— health, divorce, change of focus, etc.—they just want out. Very often there may be no viable market for the business and so the owner is forced to finance the purchase.
I bought several of my first few karate schools for no money down. In fact in a couple of cases I got the going business for absolutely nothing as the doctor who owned them had lost interest and just wanted his name off the lease. The businesses were barely breakeven but they were up and running and in a matter of months I had turned them around, having spent no money to do so.
9. Suppliers. There are many industries in which suppliers are willing to put up some or all of the money to make you a distributor of their product. For example it’s typical in England for breweries to offer very generous loan terms to publicans looking to buy a pub, provided of course they commit to selling that brewery’s brand. Dental supply houses will often finance new dental offices. Even if they won’t lend you the money you will often find larger suppliers willing to give you their goods on the basis that you pay them when you sell them (consignment), which is another way of getting financed in retail..
10. Customers. By far the best way to find cash is to find it from your customers, either existing or future. How do you do that? You pre-sell memberships before you build your golf course. You pre-sell condos before you break ground. Pre-sell health club memberships before you open. You require payment up front to develop custom software. You sell options to buy your product, like say an exotic car. Recently I saw the Jim Russell Racing School offering a lifetime membership for $295,000. We did the same thing in the martial arts business, selling black belt programs 3-4 years up front for $3000 or more.
In fact if you think about it there are a lot more companies using this method of financing than you might have thought.
Bootstrapping, suppliers, sellers of businesses, or customers offer your best options for financing.
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