Should I Borrow My Start-up Cash?
(YoungBiz.com) - You've probably heard the expression "It takes money to make money." While that's debatable--some entrepreneurs have built empires out of the most meager of resources--one thing is for sure: A little cash from the get-go can certainly make the going easier.
As a budding entrepreneur, the thought of just how you're going to finance your dream has likely crossed your mind. There are basically two ways to get the cash you need for your new business: You can save it yourself, or you can borrow it. And there are lots of options within those two categories.
Getting a good grasp of your options is an important first step. While you're making up your mind, consider some of the routes other 'treps have taken.
|Get the whole story on how Daniel Dawson used his ingenuity and resourcefulness to jump-start his radio career at YoungBiz.com.|
One of the best ways to fund your business is to use your own money--no interest to pay and no one to persuade. That's what Daniel Dawson of Center Point, Oregon, did when he decided to pursue his dream of becoming a talk show host.
Although Dawson and his co-host, Jacob Ghena, both 19, save on operating expenses by doing all the production themselves, there's still the matter of the tapes, music, courier services and money for travel services. Dawson estimates those costs at about $100 per show. To cover that outlay, he tapped into his savings as well as money earned from his job as a production assistant at Talkradionetwork.com.
Of course, there is one drawback--if your company will take a healthy sum to get up and running, it may delay your venture into the world of business ownership. That's why many entrepreneurs supplement their savings with other forms of start-up cash.
One of the criteria for being a successful entrepreneur is creativity. And that's an attribute Angeil Brown of Houston definitely has going for her.
Brown, 20, has always loved photography. So it seemed natural when she, along with nine of her camera-loving friends, decided to start a photography business.
Their first challenge was to come up with the money they would need to buy supplies--everything from cameras and film to developing equipment. That roadblock could have been discouraging. But one of their teachers had an idea: Why not sell stock in their company?
The new partners did just that, selling shares of their new company to interested parents, friends and teachers for $1 each. In return, stockholders would evenly split 10 percent of the company's profits. "It's a win-win situation," Brown said. "As business owners, we are able to cover our expenses, and, at the same time, our investors make money when the company profits."
Borrowing money from those who know you best is the place many entrepreneurs, like Marlena R. Cooper, turn when they're just starting out.
The 20-year-old singer from Jefferson, Texas, performs at jazz festivals and special events. Although she strives for her business to be self-sufficient, as it's grown, she's needed to borrow money here and there. "I had to borrow money from my mom and uncle for soundtracks, a sound system and my own microphone," Cooper explains. "Then I had to find a way to pay it back."
Cooper and her uncle drafted a loan agreement. "He laid out a plan telling me how much he planned to borrow and when he wanted it back," she says. "We wrote it up, I typed it out, and we both signed it." Cooper established a budget and made regular payments to pay the loan back.
Get It in
While it may be easier to obtain a loan through a friend or relative rather than a bank, that kind of arrangement comes with its own risks. Misunderstandings can put a serious strain on a relationship. That's why it's always a good idea to get your agreement in writing, as Cooper did, no matter what. Here are some tips for structuring a loan agreement with a friend or relative:
- Explain why and how much money you need.
- Put the loan in writing, and have both parties sign it.
- Expect to pay interest on the money you borrow.
- Set up a payment schedule.
- Make payments promptly, and accelerate, or pay more on the loan, if possible.
Make It a Combo,
When it comes to financing your business, you don't have to choose just one type of funding. In fact, many entrepreneurs get their start-up money from a combination of sources. To get an idea of where you stand, fill in the blanks to create a plan for financing your start-up:
A. Start-up money required ____________
B. Personal funds on hand______________
C. Investments or loans from family/friends___________
D. Other debt financing------___________
E. Other equity financing (i.e., selling stock)__________
F. Total start-up financing available__________
If your total financing available (F) is less than the start-up money you required (A), you will have to work on reducing your start-up costs or finding creative ways to increase the total financing you and others are willing to provide your business.
No matter which option or combination you choose, the bottom line is to be sure that you're comfortable with your plan. After all, when the employees go home at the end of the day, you'll be the one left holding the note on the loan.