How to Start Your Business by Using Other People’s Money

By Thursday, September 4, 2014 0 , Permalink

After talking about starting up that little family bistro for years, you have finally decided to do it. The only remaining challenge is securing the funds to get started. Don’t feel bad. For the most part, that is everybody’s problem. Before you head over to the bank and secure a business loan, there are a couple of things you need to know:

First the business failure rate is even worse than the divorce rate. About 8 out of 10 entrepreneurs starting businesses fail in the first 18 months. You are going to need a longer runway that gets you past the fail period.

Second, there are safer ways to finance your business than risking your own money. Many new owners start off with the bravado of a teenager who is convinced of his own invulnerability. They talk about going for broke, as if that were a good thing. One business strategist put is this way:

The result of the ‘go for broke’ strategy is a tired owner who feels he can’t take a vacation, who continues to pour resources into the business until the retirement fund and the college fund are gone, the house has a third mortgage, and the credit cards are maxed out. He ends up where he seems to have meant to go… ‘broke’.

Down that road lies madness, as well as depression. Before you get to that destination, there is a little town called recovery. It is often overlooked, but worth taking the time to find. People who bet big should be prepared for big losses. There are a number of legal firms that specialize in credit repair, debt consolidation, bankruptcy, and more.

Narrowing your options can be a challenge as one credit repair service seems much the same as another, at least on the surface. However, there may be some advantage in seeking out a law firm that specializes in credit repair such as Lexington Law, as they are held to a higher standard than most credit repair agencies.

If you insist on that bank loan secured by your personal assets, the search for a credit repair firm might be in your near future. However, if you want to scratch that entrepreneurial itch without risking your family’s security, here are a few options to consider:

Crowd Funding

Perhaps you have heard of Kickstarter. It is by far, the most popular crowd funding option available. While it may not be the best for starting a restaurant, it is perfect for just about everything else. If you have an invention you want to produce, but don’t have to funds to mass produce it, kickstart it. If you have a movie that you want to green light, kickstart it.

The way it works is surprisingly straightforward and effective. You make a video explaining exactly what it is you are wanting to do. Show an actual prototype of your big idea at whatever state it is in. Be up front about how much you will need to get the idea into production. Offer some type of incentive like a discount on the first run product to backers. And watch the money roll in. At the very least, doing this will help you gauge how much public interest there really is in your big idea.

Find an Angel

No, I’m not referring to some sort of divine intervention. I am talking about finding an Angel investor. These are wealthy individuals who have lots of money to invest in the next big thing. They help a lot of entrepreneurs get started in hopes that a few will be successful enough to make their investments worthwhile. If you have ever watched the show, “Shark Tank”, you already have a good idea of how it all works.

Bring on Partners

Like angel investing, partners are people who want to buy a stake in your new business. You may have the big idea, but they have the money you need to make it happen. They are willing to take on the financial risks in exchange for a percentage of ownership in your business.

This strategy is often avoided by entrepreneurs because they do not want to give up control of their business. But having 50% control of something is a lot better than having 100% control of nothing.

While all of these strategies have their risks and challenges, they are all still much better than risking foreclosure and living with the in-laws. Every startup entails some risk. Choose the strategy that lets you most easily recover and try again. This is best done by using other people’s money.

 

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