Common Money Sources to Start or Expand a Business 

Wealth Z, Updates.

Mike McKeever

1️⃣ Money from your personal savings.

There are at least two ways to increase the amount of money you can put into your business. 

A) Living Expense Deferral

👉 Also known as Borrowing from The Future, involves deliberately falling behind in monthly living expenses or taking cash advances from credit cards. 

👉 By taking cash advances from credit cards means, if you have a credit card or two that has most credit available: by running your credit line to the maximum, sometimes you can obtain some cash from an unexpected source or buy material for the business. 

Of course, the interest rates are high, and bankruptcy may follow if you can't make payments. 

👉 By falling behind in monthly expenses means, if you have a good payment record with the telephone company, gas and electric company, landlord, bank, and so forth, you should be able to skip several months' payments without seriously damaging your credit rating. Of course, you'll have to catch up again fast. In the mean time, you can use the money to help you get your business going.

👉 You also may be able to fall behind a month or two on your mortgage payments and generate some quick cash that way. However, the mortgage holder will take the property back from you after a few months unless you can become current again quickly.

B) Trade credit

👉 Arranging for trade credit involves borrowing from the companies from whom you will buy your merchandise or raw materials.

👉 Retail, wholesale, or manufacturing business can be helped through trade credit considerably. For service business, it's kind of hard to say so since it would mean lending your employees' salary. 

👉 In most business, you typically order supplies and pay for them 30 to 60 days after you receive them.

👉 The problem for new businesses is that it's also standard practice for suppliers to demand cash up front from start-ups. However, this policy is not immutable. 

👉 Often, if you present your business plan to potential suppliers, you can arrange to order at least some supplies and merchandise on credit.

👉 After all, your supplier has an interest in helping you succeed so that you will buy his merchandise for many years to come.

👉 Here, the key to maintaining good relations with suppliers while borrowing from them is to keep them informed of what you're doing and why.  

This communication rule is particularly important for new businesses. 

👉 If you arrange credit and can only pay a part of your first bill in 30 days, pay that amount and ask the supplier for short extension. Some suppliers may offer extended payment terms to get your business.

👉 Occasionally, a supplier will ship merchandise in a slow part of the season and let you pay for it several months later, in the busy season.

👉 Before you try any of this, check with your suppliers' sales reps about company policies.

👉 Your suppliers are invaluable to your business, and you want to keep them on your side.

2️⃣ Money from friends, relatives, and business acquaintances 

👉 The main difference between this type of financing from that of strangers financing is that the availability of money in the first place and the interest rate or investment return. 

👉 With friend- or relative- provided financing, the commercial model is not the only one, a common alternative is the loan-gift hybrid.

👉 A loan-gift hybrid means a relative or friend lends you money at either a low interest rate, or with no interest at all, telling you to pay it back when you can and to treat it as a gift if you can't.

👉 The other main advantage of this type of financing is that your relatives and friends are likely to be more understanding than a banker if you have start-up problems and make a few late loan payments. 

⚠️ If you receive substantial gift in one year from any individual, make sure you check with a tax advisor since there may be tax complications.

👉 Generally, property you receive as a gift, bequest, or inheritance is not included in your income.

👉 However, if property you receive this way later produces income such as interest, dividends, or rentals, that income is taxable to you. 

⚠️ Make sure you read and understand your state and federal income tax laws.

👉 Finally, write down the terms of the loan or transaction and make sure everyone thoroughly understand them. 

After all, you want to feel like you can go to family reunion even if your business fails.

⚠️ Also, think about what a business reversal could do to your personal relationship, even if your relative or friend says they don't need the money. 

👉 A loan from a relative or close friend that comes with emotional strings probably isn't worth the cost. 

👉 Be wise and treat people close to you in a business like manner since the agenda here is business.

On the other side, 

👉 Some people looking for business financing will write a business plan and loan package and then show it only to the bank, assuming relatives or friends don't need to see it. This is a mistake. Make sure those people close to you get the benefit of all your hard work. A good business plan may even help them see you in a new light and encourage them to make a financial commitment.

⚠️ CAUTION 

Don't make the money a test of whether they love you or not.

👉 If they don't wish to invest or lend you money, accept their reasons.

3️⃣ Money from creative cost-cutting

👉 Although not really a funding source, one of the most effective ways to finance a small business is to make do with less. 

For example, If your initial business proposal calls for $50,000, think about how you can reduce spending on nonessential items. Perhaps you can begin your consulting business in your home or share expensive equipment with an established business rather than buying it.

👉 The most important principle here is not that you should avoid raising outside money, but that you should borrow or raise equity capital ONLY if you absolutely can't do without it. 

4️⃣ Money from equity in other assets 

👉 You may choose to raise money by selling existing assets or by pledging your equity in them as collateral for a loan.

👉 Remember, banks also don't like to finance 100% of an asset's value.

E.g, If your equity on your asset is $5,000, you'd probably be lent less than $5,000. 

Basically, 

Equity = Market Value of Property You Own ➖ (What You Owe Against It ➕ Costs Necessary to Turn the Asset into Cash) 

5️⃣ Money from supporters 

👉 Many types of businesses tend to have loyal and devoted followers- in many ways their customers care about the business as much as the owners do. 

👉 The business can be a health food restaurant, an exercise club, a motorcycle shop, a family counseling facility, a solar heating business, a religious bookstore, or a kayak manufacturing shop.

👉 No matter what your business or business idea, think about who you know or can get to know and who really cares about what you plan to do.

👉 Share your idea with these people and be ready to listen to them.

👉 You'll surely get lots of good ideas, and you may be surprised at how easy it is to raise money for what people perceive as an honest and needed endeavor.

6️⃣ Money from banks (including financial institutions that lend to business and individuals)

👉 Banks always want to see a written business plan along with your loan application.

👉 They are financial intermediaries => they pay interest to account holders to attract deposits, which they lend out to people like you. 

👉 When lending, they charge enough interest to pay for their cost of funds and produce a profit.

👉 Some commercial banks work closely with the Small Business Administration (look for institutions like Small Business Administration in your country) in offering loan guarantee programs. 

👉 If you want a loan but don't qualify under the bank's normal guidelines, the banker may suggest that you apply for an SBA guaranteed loan.

👉 This program works for start-ups as well as expansion of a successful business.

👉 Also, most commercial banks will usually lend a start-up is half the cash needed.

👉 In addition, they usually require that you do not borrow all or most of your cash from someone else; they want you to have as much to lose as they do. 

👉 For expansion, banks may take account receivables and inventories.

👉 The good news about banks is that money generally costs less from banks than from other professional lenders, such as mortgage loan bankers. 

👉 If the bank lending officer likes your business plan and loan applications, and you have sufficient collateral, he may give you an interest-only loan for a short time, with the option of converting it to an amortized loan later.

👉 That means you can delay larger principal payments until your business has a chance to generate a positive cash flow. 

Then, you might even get a change from immediate payment to amortized if you show favorable prior results in your repayments.

7️⃣ Money from venture capitalists 

👉 A venture capitalist is anyone who invests equity money in a business in the hope of future profits.

👉 Typically, the term connotes a group of businesses that look for hot companies in which they can make large profits. So they won't consider any investment smaller than $500,000 and prefers companies specializing in the emerging technological fields, where a lot of money is needed to get started and where it's possible to achieve enormous returns. 

Such as, computers, genetic engineering, and medical technology.

👉 However, relatives, friends, business acquaintances, and local business people with a little money to invest can all be pint-sized venture capitalists.

👉 Many cities have venture capital clubs, comprising groups of individual investors interested in helping businesses start and grow.

👉 These clubs often serve as an introductory service- you receive a few minutes to discuss your business at a club meeting. 

If any investors want to pursue the discussion further, they make an appointment with you privately.

👉 You may also be to obtain computerized lists of venture capitalists and investor magazines in which you can advertise your proposition.

👉 Often, these clubs are formed and disbanded rapidly; ask the local chamber of commerce or your local bankers if there is an active club in your area.

What You Are Getting into Here Is,

👉 Amateur venture capitalists or equity investors gamble on your idea for your expansion or new venture.

👉 They invest money hoping that you'll make them rich, or at least richer.

If you intend to look for equity investors, your business plan needs:

👉 enough economic and marketing research to show investors that your idea has the potential of making a substantial profit.

👉 to show potential investors exactly how they'll profit by investing in your business.

Example:

Jack Boots spelled out his profit distribution plans in his limited partnership document: Investors received 50% of the profits paid monthly according to their relative share of investment after he paid himself a nominal, agreed-upon salary for running the store. In addition, they qualified to buy merchandise at a substantial discount. 

They also owned a share of the assets of the business. Jack estimated that a $10,000 investor would receive a monthly cash flow of $200 for an annual return of 24%. When added to the partner's investment share in the inventory of the shop, this would make a $10,000 investment worth $20,000 in three years.