STEP 4.  MONEY MAKES THE WORLD GO 'ROUND

Finances. Ugh.

Who wants to tackle this piece of the puzzle? Not many of us, to be sure.

In the first three parts of this series we talked about your business concept, who your customers are, and where you are going to locate your business.

You're well on your way to having a successful plan. However, I would venture to say that many good ideas never get off the ground because the financial requirement stops a person cold. So, today, we delve into the touchy topic of money.

Less than 3% of the world’s population that has an overabundance of funds. And if you’re reading this, I can surmise that you’re probably not in that 3% category; which means, you will be looking for sources of financing.

There are a number of ways to finance your business idea and bring it to life. If you are asking others to invest in you, in your idea, they will want to know the likelihood of getting paid back and/or how much money they can make on the deal. As you prepare your package to present to lenders and potential investors, always wear the hat from their perspective. What are they going to want to know about you, your business and your financial security?  This is all summed up in one word: RISK.

There are 4 common avenues to acquire funding for your business.  In all cases, you should be prepared to include some of your own money in the project. It’s what we call having “skin in the game.”  Investors look at how much you are willing to put in versus how much they will be putting into the pot. The more you provide, the lower their risk.

Think of it another way: the higher the risk, the higher the payback needs to be. That could be reflected in a higher interest rate or in a higher percentage of ownership if you take on equity partners.

A lot of other factors go into the total risk equation such as your expertise and experience level of running this type of business – have you had success in this type of venture already?

Delivering on what you promise, paying on time and so forth, will be fundamental for building that trust between you and your new “partners.”  That’s a topic for another day, however.

Here are the 4 most common funding alternatives: 

1) Fund it all yourself.
In the first scenario, you’re providing all the money needed to start up your business and to keep it afloat until it is profitable. In this situation, you are not requiring a bank to help you get started.

Funding it by yourself often means you’ll be building your business more slowly than if you have additional money behind you. That’s a great strategy – and one that will undoubtedly keep you from having debt that could easily get out of hand. Just know and understand the pro’s and con’s of either strategy. Frankly, in today’s quirky economy, being able to stand on your own two feet on a new business plan would be a great test of readiness and self-trust in your dream and in your abilities.

Start building that relationship with the bank where you do business. You’ll want to strengthen those ties before you need to borrow their money.

2) Borrow from family and friends.
This is also a common plan for many entrepreneurs. There are some success stories out there, I am sure. However, mostly we hear about the awful, sad stories that result when a business plan goes bad and everyone you know and love has been let down. 

Always, always, have a legal professional help you in drawing up the documents that will serve to protect everyone – and make sure everyone understands what they are agreeing to.  Many family feuds have developed over disagreements on how you’re spending their money.

3) Borrow from the bank or traditional lending institutions
This is the common avenue most business owners follow as they create and build their business. It’s also a tough process where R-I-S-K is the great measuring stick for the lenders. 

They’ll require a lot of information from you, and it will all add up to a picture that they will view to determine if your plan is worth investing in.

Know that they also have your interests at heart. If they feel you’re undercapitalized or your idea is not too convincing, listen to them. They are experts in money management and I’ve know many to heed the advice of their bankers and come out with much stronger business plans and profitability.

This group and the one mentioned in #4 below will really want to know how much you’re putting into the business. I don’t know of too many places out there – and certainly not in today’s tough times – that will loan you 100% of your capital.

4) Look for outside investors and venture capitalists
This group works much like the bankers in #3, and yet they’re a little different. They are usually willing to take more risks with you. One difference in this group is that many of them also want a piece of the action – they want part ownership in the business. 

Venture capitalists are great for ideas which aren’t yet common, run-of-the-mill business opportunities. They’re looking for the next Microsoft® or GoogleTM

So defining your funding plan is a crucial component of your overall business plan. It’s a good idea to work with financial experts and business-building experts who can assist you and open up your mind to alternatives for consideration. They’ll also know what ratios are attractive to the lenders (what percent you will put in versus borrow).

As always, consult your legal professionals regarding all documents you want to draw up as well as any you may be signing with other parties. Paying attention to details is a crucial element of a successful entrepreneur.

Know that you will be expected to put your money on the line as you start a new business endeavor.  Make sure you have sufficient funds (1 year’s worth, at a minimum is my suggestion) to sustain your personal life (household expenses like mortgage, car, credit cards, insurance and so forth). Most businesses take a lot of start up money to get off the ground. Sales are not steady until several years later. You can help strengthen your lender’s opinion of your business skills by showing them – up front – that you know and expect what it will take to get your seed of an idea to bloom and prosper.

In our next article - and the last article in this series - I’ll share with you how to bring all of this together and create your Business Plan.

To your Success!

Have a Golden Day!
Coach Darlene