Raising money to finance a business startup is difficult; but raising money to finance a business startup during a recession is nearly impossible. I started a business shortly after the stock market plummeted in 2001. People told me it was the best time to start because finding talented employees and office space is cheaper during an economic downturn. That was true, but the reality was that getting money from investors to pay for employees and office space took considerable effort and creativity. In today's recessionary environment, here are some options if you've taken the plunge and need to raise money.
- Borrow from yourself. Entrepreneurs tend to rely on their savings for about 30 percent of their initial startup funding. But don't just take this money and purchase equity in your company. (You should already have enough founder's stock.) Lend the money to the business so you can pay yourself back at a later date. For sums as low as $15,000, it's perfectly reasonable to use proceeds from future revenue--or even future investors in your business--to pay yourself back.
- Borrow from family and friends. Getting loans from family and friends is the time-honored way to finance a startup. These private business loans are a win-win, because they often have an interest rate that's 2 percent to 3 percent lower than the market rate (benefits you) and 1 percent to 2 percent higher than the high yield savings rate (benefits them). In today's economic climate, this spread has widened considerably: Banks are charging more for loans to you and paying lower interest to depositors.
- Borrow from people who are patient. In a downturn, think twice before taking on debt that needs to be repaid immediately. It's notoriously difficult to forecast revenue for a startup, and short-term loans are riskier during uncertain times. Within your network of business associates, mentors and suppliers, you'll likely find supporters willing to provide a grace period on repayment. For example, you can arrange to borrow money with a three-year grace period and create bonus payments to lenders if you reach certain business milestones. Famous entrepreneur Sam Walton relied on patient investors from within his social network during his startup stage.
- Borrow online. The web has sprouted many new small-business financing alternatives. Try On Deck Capital, an online lender that looks at your cash flow instead of your credit score and tax returns and collects small daily debits instead of larger monthly installments. Also, person-to-person loan websites allow you to borrow from strangers. Google "person to person loan" to find companies that allow you to post your request for funds and will match you with an individual lender. Although interest rates tend to be high, these sites can be helpful to entrepreneurs seeking funds during the credit crunch.
I'll join the chorus of experts who say starting a business during a recession is a good idea, as long as you recognize it'll take extra effort to raise money in the months ahead.
Asheesh Advani is president of Virgin Money USA, author of Investors in Your Backyard and founder of CircleLending, which pioneered the business of managing person-to-person loans and mortgages and was acquired by the Virgin Group.