Everyone has good ideas. Some of them may even be million dollar ideas, but if you live from paycheck to paycheck or beyond your means, you may never be able to quit your job and start a business. Why? Because the money to start your new business will come from your right or left pocket. As the SmallBizLady, I often get emails, Facebook messages, and tweets from people asking me to help them start a business.
My first questions are usually the following:
- What is your business idea?
- How much money do you have saved?
- How much money do you think it will take to launch this business?
- Where are funds going to come from to start your business?
You should have three pools of money before you start a business:
- An emergency fund for the household (6 months of salary)
- 12 to 24 months of budget to run your household
- 12 months of money to launch and operate the business.
Your ability to save has everything to do with your ability to start a business! Money is not everything. It’s just a tool, but you must have your own money to invest in your business. Banks rarely, if ever, loan money to start-up businesses. The best you can hope for is a micro loan for up to $35,000, and that’s only if you have excellent credit and a solid business plan. Banks will typically not deal with you for a loan or line of credit until you’ve been in business 2 to 3 years and can show positive cash flow and growth in the business. You must present your financial statements and business tax returns in order to deal with the bank.
There are franchising opportunities that can provide some working capital, but 30 percent of the money will still come from you. And by the way, you will need to have significant net worth and assets to collateralize the loan. Think of it this way. No credit = no business. When you are first starting out in business, you are your business’s credit.
So what do you do if you have a great idea and no money?
There are other sources of funds to start your business. There are the 3 F’s: Family, Friends, Fools. If you are fortunate enough to have a family that can afford to invest in you — you are fortunate, but beware. Your rich Aunt Sally may think she’s your boss and might call you up every 30 days to check on how her $50,000 investment is doing. You may not want that kind of pressure.
Then there are your friends. Nothing can kill a friendship faster than borrowing money that you can’t pay back. Why would you risk any of your long-term friendships on a risky business venture?
Every once in awhile, a hungry entrepreneur will come across a rich guy who’s an idealist about business, who falls in love with your idea but doesn’t wish to run the business. That is an angel investor — or someone who will invest money in the company for an equity stake. This person will also lean on his or her network to help you. You could waste a lot of time chasing a potential investor. It’s very tough to convince an angel investor to provide funds for a small business. One of the keys to understanding if your business is a good candidate for investment is to answer this question: “Will your business attract one million eyeballs on your product or service?” It can happen, but let’s just say you are better off using your own funds to start your business, because it could take as much as two years to close investment capital.
Family, friends, nor an angel investor will invest in a half-baked business idea. Invest your time to make sure you have a sound business plan before you take anyone’s money. And make sure you have a plan for when and how you’ll pay it back.
Republished by permission. Original here.
Piggy Bank Photo via Shutterstock
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Perhaps a little strong in the wording (definitely a wet blanket feel) but it’s true that most aspiring entrepreneurs don’t think through the financing thoroughly enough. Saving up the requisite funds and self-financing requires discipline that will be quite handy when things get tough in the business.
Melinda: How many startup companies have these kinds of financial resources, do you think?
I think that the element of time has something to do with that. In order to do that, you have to wait 2 years or more to just take action. That is a long time. So some people just plunge in and try the waters. Some succeed but a lot end up failing.