Swimming With Sharks Internet scams, money from mom and dad, tax-trimmers

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 radiateintegrity, most aren't--and don't. Yet the semblance ofsophistication combined with ease lure unsuspecting entrepreneursinto deals that often prove costly.

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

"Many are using the Web to make quick money off smallbusinesses," Entekhabi warns. "The Internet allows themto create a sophisticated persona that enhances anentrepreneur's comfort level. You can go to a Web site thatlooks very professional and prestigious, but in reality, you haveno idea whom you're dealing with."

Entekhabi says he's seen clients "ready to sign dealswith money sources demanding 16 percent of funds raised, $25,000 inadvance for nonaccountable costs, plus warrants [guaranteeing theright to buy stock in the company at a set price]. That's agood 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 varietyof other angel sites and introductory pages. Most venture capitalfirms have decent sites that can be found through search enginesjust by entering `venture capital.' "

How to sort the good from the bad? Make it a point to knowexactly whom you're dealing with, Entekhabi advises. "Lookfor firms that describe their funds, detail the types ofinvestments they make, and maybe even disclose the companies intheir portfolios so you can see if your type of business iscompatible with their investment interests," he says.

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

It's not necessary to avoid the Net as a vehicle foridentifying potential funding sources. But, as with any financialmatter, be cautious. Investigate all deals carefully, and don'tdo anything before consulting your attorney or CPA.

Paul De Ceglie (MrWritePDC@aol.com) is a formerstaff reporter for Journal of Commerce and AmericanBanker.

10 Tax Tips In 2 Minutes

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

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

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

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 extentit's used for business. Your choice: 31.5 cents per businessmile (this amount may change this year) or actual expenses relatedto business. Zero deductions for personal use.

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

7. Entertainment. Treat clients or prospectsto a night out and deduct half the bill if you discussbusiness.

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

9. Miscellaneous. Don't overlookincidentals such as telephone bills, answering service,professional journals and trade magazines, bank fees, associationdues, health insurance premiums (45 percent on average), businessinsurance, fees and licenses.

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

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

Count Me In

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

Just starting out? Confer with an accountant to design anaccounting system, plan a tax strategy, prepare a business plan andget advice on the best form of business to establish. Alreadyoperating? Your accountant can help you manage money, customizeretirement plans, generate financial reports, deal with the IRS andmore.

To begin, get referrals from your banker, attorney and otherentrepreneurs in your community. Make a point of also asking peoplein the same business sector (service, retail, restaurant,manufacturing, etc.). Then personally interview at least threeprospects to ensure your levels of comfort and trust. Ask whatexperience the person has in your type of business, and get a clearpicture of all fees.

Independent accountants or small accounting firms can providepersonalized service, while a Big Five firm offers more servicesand can lend prestige to your company, smoothing the way to raisingcapital, establishing credit and opening doors. But don't usean accountant to pay the bills, make bank deposits and the like; abookkeeper is just as effective and much less costly.

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

Too Close For Comfort?

Question: My parents and other relatives haveoffered to lend me money for my new catering business. Should Itake 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 ofever getting their money back?
• Can they lose the money without endangering their lifestyle orfinancial security?
• Will they invite you to Thanksgiving dinner and share Christmaswith you after a loss?
• Will you give discounts and cater family parties for free?

Money from relatives carries a high emotional cost and lots ofunintended strings. You'll feel guilty about using this money.Never do a "let's shake hands on it and you pay me backwhen you can" deal. It creates too many misunderstandingslater about who said what, who heard what, and what was reallyintended.

Make it a professional arrangement, just like a bank loan. Signa note. Pay a fair market interest rate. Also write a separateletter of understanding. This letter stresses the risk of yourbusiness and of the loan; that it is a loan, not ownership; andthat you are obligated only to repay the loan. Sign the letter andhave them sign it, too. Your lawyer should bless the paperworkbeforehand.

Later, when you're working yourself to death on the businessand 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 onlyhalf a step behind love. Spending profits on yourself--a better caror a trip--before the loan is paid off will create resentment amongyour 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 asmall-business consultant and author of Borrowing to Build YourBusiness: Get Your Banker to Say "Yes"(UpstartPublishing, $16.95, 800-235-8866). Send him your financingquestions at bsumag@entrepreneurmag.com.

Contact Source

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