10 Ways to Finance and Start a Business

Hello, I'm Brian Tracy and I have personally started, built, managed or turned around 22 businesses. But more than that, I've worked with more than 10,000 business owners, starting with business owners, starting one person businesses on their kitchen tables, and people who run billion dollar enterprises. And one of the questions that keeps coming up is where do you get the money to finance your business? Well, there's many different ways. And in this time that we spend together, I want to give you 10 ways that you can finance your new business or 10 ways. The most popular and common ways for people to do it. The first way that you finance your business is with your assets. In other words, you have to finance it out of your own pocket. 68% of startup financing comes directly from the pocket of the business owner. I remember listening to a professor talk and saying, never put your own money into your own new business. And this person was a complete idiot. You cannot start a business without your own money and nobody will lend you any money unless you've got hurting money on the table in there. So you can sell high priced items that you simply don't need to raise the money. One of the things that I did, I sold one of my cars, I sold my furniture, I sold my house, I sold my savings accounts and my bonds and equity. You know, sometimes you have to sell a lot of stuff to get the cash you need. You can take out a home equity loan or a home equity line of credit. If you have enough equity in your house, you can use 401 or IRA savings accounts and you can also use a registered retirement savings account in Canada if you have it. Now there are pros and cons of both of these, but the fact is that if you're really serious about starting your business, you're going to have to like playing no limit poker. You're going to have to go all in when you play poker. Now a second way that you can get money to start your business is with angel investors. Now angel investors are people who have money and they've made it through their own business and through their own careers. And what they're looking for is opportunities to get a high return on their money. I was just talking today with the head of a very, very large company and they have put aside a reserve fund of many millions of dollars. And when companies in their industry have ideas and want to start up, they come to them and they have a series of requirements. And if the company meets the requirements, they will put in some money to see what goes on. The venture capitalists and these are kind of angel investors are kind of like little venture capitalists. They'll make a lot of small investments, hoping that one or more of them will really explode. The reason that you use them is because there's a lot of them. They have different parameters. Some invest in high tech, some invest in restaurants, some invest in different types of businesses. They also bring with them really good knowledge of industries. So they are not only an investor, but they give you really good ideas. And sometimes they can give you guidance with regard to product development, marketing, sales and so on. Now the pros and cons, the pros of using an angel investor is they've got the money and they can make a decision quickly. The cons are, is that they will want to take a part of your business, sometimes a substantial part. Like venture capitalists, they'll often want the right to step in and take over your business and push you out completely if you do not deliver on your projections. They want to protect themselves and they're very smart about protecting themselves. Now where do you find them? Well, you can talk to your banker, you can talk to your accountant, you can look in the newspapers because sometimes they advertise. You can go on the Internet and search for them. You can even put an ad in the paper or on the Internet or Craigslist saying that you're looking for an angel investor to take a position in what appears to be a potentially very profitable company. And often they will find you. One last thing. There are often meetings and seminars, workshops and actual mastermind meetings where angel investors get together to talk about what's going on. And if you check around, you can find these meetings and often you can go there and give a presentation. Now, the third place you can get money is friends and family. Now it's interesting, with friends and family, we say that they call this love. Money is people will give you money or lend you money because they love you. Now, it's a terrific idea in theory to get money from your friends and family. When I started my business, by the way, I have used all of these and I had to go to my brothers and I had to go to my parents, and I had to go to my friends that I'd worked with and hat in hand and ask them for money to get started or to keep going. Now, there's one crucial rule when you're dealing with friends and family is put everything in writing, is make sure that it's absolutely clear how much they are putting in and how much they will get out and when they will get it out for Example, when I borrowed money from my friends and family, they wanted a piece of my business. So I offered them 10% of my business for a certain amount of money, 20% for another. But I had the right to to buy them out by paying them twice as much as they'd invested within three years. And within three years, instead of leaving them holding part of my business, I bought them out and was able to walk away owning my business. It was expensive, but it was good for them, and it was good for me because I had the money I needed at the right time. The pros and cons of friends and family are that they can be a real pain in the neck. They can call you up every day and say, how's it going? When can I get my money back? How soon can I get my money back? And so be careful when you take money from people that you know, it can be more expensive than you realize, and not just financially. Now, another place to raise money is with credit cards. Now, it's good in theory to raise money with credit cards, but before you turn to plastic for financing, consider the risk. The pros are you can get large amounts of capital quickly. The cons are you pay very, very high interest rates. So if you're going to borrow money on your credit cards, plan to pay it back quickly, because if not, that interest will add up fast and it can eat you alive. Now, when I started off my business, one of the things I did, and somebody taught me this, get good credit before you need it. So one of the things that I did was this is I took out credit cards and paid them all off, and I used them and pay them off. And then gradually, over time, as I was working for another company with a steady paycheck, the banks kept raising my limit. When I started my business, I had like $100,000 worth of limit on my credit cards. I have a friend who was working for a Fortune 500 company. He did the same thing. He took out every credit card he could. He ran them up and got the maximum limit while he was working for this huge company. And when he started his business, his limits on his credit cards just traveled with him, and they saved his financial life. They kept him alive until his business was successful. So that's one way of doing it, but it's not a great way because it's so expensive. Now, another way to raise money in financing is with bank loans. Now, it's the most amazing darn thing. People say, well, just go to the bank and borrow money. So you go to the bank and the bank says no. And you go to the next bank and the bank says no, because, see, well, why won't banks lend me money to start up my business? Banks don't lend money to startup businesses. Banks are in the business of making good loans that they are absolutely sure can be repaid. Now, banks are the most traditional and conservative ways to finance a business, but they're the hardest loans to get. Why? It's because the banker that you're talking to, his pay, his bonus, his promotion, everything is totally determined by him making good loans. So they don't care about the fact that your business idea is a great business. They mentally put that aside. What they want is convince me that you will pay the money back even if your business collapses. So what do you need? Well, first of all, you need a solid business plan when you go to visit the bank, and you need realistic financial projections. Also, however, you need collateral or other existing business assets that they could seize in the event of a default. Here's an important point. When I started my business and I built it successfully, and then I moved to a new city where I needed to get a new loan, I went to the bank and they went back and forth with me for weeks and months. And finally they told me that they needed 500% of asset collateral for every $1 that they would lend. So I had to prove to them, I had to put up my house, my car, my royalties. I had to give them and prove to them that I had $5 for every dollar that they were advancing me. Once they were convinced of that, and he told me on the side, by the way, this is what we look for in a new business. Then they lent me the money and watched me very closely. And when I paid it back, over time, the then they reduced their collateral requirements, so all it required was my business operations and a personal guarantee. Here's an important point. If anybody tells you, oh, you want to borrow money but don't give a personal guarantee, then they'd have no idea what they're talking about. Because I've been in business for 25, 30 years now, and I still have to give personal guarantees. Everybody does. That's just the nature of the beast. Unless you have property that is so much more valuable than the loan that, that you can say, no, I don't give personal guarantees. And they'll say, okay, just thought I'd ask for them. They will lend you money because your asset is worth much more in the open market to sell to cover the loan than the amount you're borrowing. But other than that, they will always require a personal guarantee from you and a personal guarantee from your spouse. Now another way to raise money is called microloans. Now microloans are small loans that you can get for short terms. The supplier of microloans in the United States is called the Small Business Administration sba. They've launched a microloan program to help small businesses secure the financing they need to either get started or to get through a tough time. To apply for a microloan is not that easy. You'll have to be within the local lending area of one of the 170 non profit intermediaries that process microloans. Most microlenders also require borrowers to complete business training and business planning seminars before receiving the loan. The other thing about microloans is that you have to put together a complete business plan and go to at least two standard financial institutions, two banks, and have them reject you and not be willing to give you the money. What we call a conventional business loan. Because why? It's because they're just not convinced that you are going to pay it back with your two refusals. You can then go to the SBA hand in hand and say, look, I've got this great business, but because it's new or because I don't have a track record, I can't seem to get conventional financing. Can you help me? And the SBA can help you, but they're going to put you through some hoops. So if you're thinking of starting a business, you call your local SBA or you go onto the Internet and you find a small business investment corporation. Often these are funded by individuals, often they're funded by governments. But their sole job is to give money or to lend money under very tight conditions to entrepreneurs and business owners, to startups who cannot get the money they need, but who have a good business idea in the first place. Now another way you can get money is called social lending. There are so called social lending websites where individuals can apply for loans from other individuals. Sometimes they're calling this, what do they call it? Where they monetize it and everybody puts money into a pool. And then there are people who watch it carefully who will lend out small loans. Sometimes they call them micro loans because they're small loans. They're secured by your business and your credit and your word. And people will put in investments like a mutual fund and their money will be loaned out to many small businesses. So the chance of high return is very good. They will give you three year unsecured loans. Now, unsecured simply means that the loan is made without any collateral. A credit card is another form of unsure unsecured loans. So remember, whenever you borrow money, the person who is lending you the money has just one thought in mind. How soon will I get it back, and how much will I get back? And if I'm lending you money and taking a piece of your business, what will be my potential upside? They don't care about you as a person and your life and your career and your history and all your hopes and dreams and business plans. All they want to know is how much in, how much, how much out, how fast, how sure. And your job in applying is to answer those questions. How much do you want them to put in? How much will they get out? How fast will they get it out? And how sure can they be that they will get it out? Another way to raise money is with trade credit. Now, trade credit is based on trust, and many companies are started on the basis of trade credit. One of the biggest companies in the United States started off with one man with a $1,000 loan from his mother. And he went out and he sold a new service. And every company he spoke to said, no, we're not interested. Until finally he found one company that says, yes, we're interested in the service. And then he said, wonderful. I'll need a deposit of 50% down so that I can install the service until it begins paying for itself. And this one customer said, all right, I have faith in you. I will pay a 50% deposit, and you can then start installing the service that you're selling. He went on to become one of the richest men in the United States. So whenever you can use trade credit, which means that you can get credit from your suppliers or even credit from your customers, you can build your business. As a new business, you're at a disadvantage because you don't have an established track record of paying invoices on time or delivering. So you need to present some credentials that you might give a bank. You might go to a supplier, a vendor, someone you're buying from. You may give them a business plan, show them your collateral, tell them about your history, and show them your financial statements, and give all kinds of proof that if they give you credit, that you will deliver on your promises as a new business. It might take a lot of legwork and a little bit of luck to secure trade credit, but it's worth it. When I started my business, I needed credit to buy audio programs that I could then sell, and then I could pay off the cost of the programs. First of all, they wanted only cash. So I had to pay cash to get the programs to sell. But after they trusted me, they gave me 30 days, then I could get the programs and. And I could sell them and I could pay them back within 30 days. So in a way, they were my bank and they were financing me. After that, I could get large credit card limits and I could buy and pay it back over 60 and 90 days. So therefore, I had no money in. I would get the product, I would sell it and turn it into cash. I would then pay for the product and keep the profits. It's just another way of doing it. And the last type of financing that we talked about before is customers. You can go to customers and ask them to pay you deposits, ask them to pay you in full, in advance. You can show them, show your business plan and convince people that your business is solid so that they can feel confident giving you money even before your business is off the ground. Now, there are many situations where this is possible. Opening a new business. For example, you can get trade credit. You can get credit from contractors. You can get credit for furniture, especially. You can get credit for the products and services that you're going to resell. We call this kiting. You buy the product and service when you sell it immediately, but you've got 30 or 60 or 90 days to actually pay for it. Now, the pros and cons of this are that if you're going to buy the ingredients to create your products and services, you have to turn them into cash quickly. What this means is that if you have an ongoing and successful sales process so that you can buy the supplies, sell them, and pay them back, you can start a business with very little cash of your own and building on the cash and credit of others. So there's lots of ways to start a business. There's actually 14 more ways that you can do it, and those ways are available to you. But the wonderful thing is this, is that if you are creative and you're determined, you can start a business with very little money down with very little of your own money and with very little of anybody else's money.