Swimming With Sharks

Internet scams, money from mom and dad, tax-trimmers
Magazine Contributor
7 min read

This story appears in the March 1999 issue of . Subscribe »

Surf the Web for business financing yields thousands of sources: banks, brokers, consultants and venture capitalists, to name a few. While some names are immediately recognizable and radiate integrity, most aren't--and don't. Yet the semblance of sophistication combined with ease lure unsuspecting entrepreneurs into deals that often prove costly.

"Internet financing is fraught with scams," asserts Massoud Entekhabi, a partner in the PricewaterhouseCoopers Global Technology Group in Woodland Hills, California. "A simple search produces numerous accounts of rip-offs. And the SEC [Securities and Exchange Commission] is taking an aggressive stand to combat fraud on the Net." (See last month's "Money" column for more details.)

"Many are using the Web to make quick money off small businesses," Entekhabi warns. "The Internet allows them to create a sophisticated persona that enhances an entrepreneur's comfort level. You can go to a Web site that looks very professional and prestigious, but in reality, you have no idea whom you're dealing with."

Entekhabi says he's seen clients "ready to sign deals with money sources demanding 16 percent of funds raised, $25,000 in advance for nonaccountable costs, plus warrants [guaranteeing the right to buy stock in the company at a set price]. That's a good deal for somebody--but not for the entrepreneur."

Not all online financing offers are fraudulent, of course. "Some sites are pretty good," Entekhabi acknowledges, "such as the SBA's ACE-Net site http://www.sbaonline.sba.gov/ADVO/acenet.html, designed to match entrepreneurs with investors. There are a variety of other angel sites and introductory pages. Most venture capital firms have decent sites that can be found through search engines just by entering `venture capital.' "

How to sort the good from the bad? Make it a point to know exactly whom you're dealing with, Entekhabi advises. "Look for firms that describe their funds, detail the types of investments they make, and maybe even disclose the companies in their portfolios so you can see if your type of business is compatible with their investment interests," he says.

Still, Entekhabi concludes, "Nothing beats a good personal introduction. [Lenders and investors] like referrals from people they know and respect. Referrals act as a first-stage filter for [both parties], and provide the business owner with a more targeted introduction. It's a more efficient process all around." Try your lawyer, banker, accountant, other entrepreneurs who have been financed by funds, banks, angels or venture capitalists for referrals.

It's not necessary to avoid the Net as a vehicle for identifying potential funding sources. But, as with any financial matter, be cautious. Investigate all deals carefully, and don't do anything before consulting your attorney or CPA.

Paul De Ceglie (MrWritePDC@aol.com) is a former staff reporter for Journal of Commerce and American Banker.

10 Tax Tips In 2 Minutes

Is your new business keeping you too busy to worry about tax returns? Take two minutes to review these 10 tips for trimming your taxes:

1. Start-up costs. Deduct them as capital expenses over five years. Outlays after launching your business are current-year deductions (normal business expenses).

2. Interest. Did you borrow funds to get your business off the ground? Use credit cards to purchase equipment? Finance a company vehicle? Deduct all related interest and carrying charges.

3. Fees. Write off payments to accountants, attorneys, consultants, other business professionals.

4. Marketing. It's all deductible. Advertising, promotion, public relations--even business cards.

5. Car. Write it off--but only to the extent it's used for business. Your choice: 31.5 cents per business mile (this amount may change this year) or actual expenses related to business. Zero deductions for personal use.

6. Travel. Off on a sales trip, business meeting, convention, seminar? Deduct your plane fare, hotel, cabs, dry cleaning and half the cost of your meals--but no expenses for accompanying family members.

7. Entertainment. Treat clients or prospects to a night out and deduct half the bill if you discuss business.

8. Home office. If it's used regularly and exclusively as your principal place of business, you may deduct an appropriate proportion of mortgage interest, rent, real estate taxes, casualty losses, utilities, insurance, depreciation, painting and repairs.

9. Miscellaneous. Don't overlook incidentals such as telephone bills, answering service, professional journals and trade magazines, bank fees, association dues, health insurance premiums (45 percent on average), business insurance, fees and licenses.

10. Penalties. If you're penalized for underpayment, increase estimated tax payments this year; make sure they equal at least taxes paid for 1998.

Consult a tax professional to ensure the above information applies to you, or check out the new IRS Web site for small businesses (http://www.irs.ustreas.gov/prod/bus_info/index.html).

Count Me In

Even the best accountant can't guarantee your success, but he or she can still be the most important adjunct to your business. Carefully choose someone who understands general small-business problems and your particular type of business.

Just starting out? Confer with an accountant to design an accounting system, plan a tax strategy, prepare a business plan and get advice on the best form of business to establish. Already operating? Your accountant can help you manage money, customize retirement plans, generate financial reports, deal with the IRS and more.

To begin, get referrals from your banker, attorney and other entrepreneurs in your community. Make a point of also asking people in the same business sector (service, retail, restaurant, manufacturing, etc.). Then personally interview at least three prospects to ensure your levels of comfort and trust. Ask what experience the person has in your type of business, and get a clear picture of all fees.

Independent accountants or small accounting firms can provide personalized service, while a Big Five firm offers more services and can lend prestige to your company, smoothing the way to raising capital, establishing credit and opening doors. But don't use an accountant to pay the bills, make bank deposits and the like; a bookkeeper is just as effective and much less costly.

For more on choosing an accountant or for referrals, call the National Society of Accountants at (800) 966-6679.

Too Close For Comfort?

Question: My parents and other relatives have offered to lend me money for my new catering business. Should I take it?

Answer: Of course--but only if you can answer "yes" to the following questions:

  • Do they really understand there's only a small chance of ever getting their money back?
  • Can they lose the money without endangering their lifestyle or financial security?
  • Will they invite you to Thanksgiving dinner and share Christmas with you after a loss?
  • Will you give discounts and cater family parties for free?

Money from relatives carries a high emotional cost and lots of unintended strings. You'll feel guilty about using this money. Never do a "let's shake hands on it and you pay me back when you can" deal. It creates too many misunderstandings later about who said what, who heard what, and what was really intended.

Make it a professional arrangement, just like a bank loan. Sign a note. Pay a fair market interest rate. Also write a separate letter of understanding. This letter stresses the risk of your business and of the loan; that it is a loan, not ownership; and that you are obligated only to repay the loan. Sign the letter and have them sign it, too. Your lawyer should bless the paperwork beforehand.

Later, when you're working yourself to death on the business and they come around to pester you, hold up the letter and say, "Here's the deal. I'm current on the note. I love you. Please leave me alone." Practice saying that--right now.

Finally, as soon as you can, pay off the loan. Greed is only half a step behind love. Spending profits on yourself--a better car or a trip--before the loan is paid off will create resentment among your family. "There he is driving a BMW with my money!" Besides, your family took a chance on you when no one else would. It's only fair to pay them back before you reward yourself.

George M. Dawson (gdawson@txdirect.net) is a small-business consultant and author of Borrowing to Build Your Business: Get Your Banker to Say "Yes"(Upstart Publishing, $16.95, 800-235-8866). Send him your financing questions at bsumag@entrepreneurmag.com.

Contact Source

PricewaterhouseCoopers Global Technology Group, (818) 673-4600, http://www.pwcglobal.com

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