Money and The Entrepreneurial Process
Today's discussion is taken from my ebook, The Ultimate Entrepreneur's Handbook. Pick up your copy on the resources page.
One of the most important aspects of the entrepreneurial process is securing financing for the business. Cash is the lifeblood of any venture, and without it a business may falter and cease to operate.
There are many sources from which you can secure financing for your business besides venture capitalists. Entrepreneurs may use their own money or borrow from friends, family and close acquaintances. While these have the benefit of low, or no interest rates and long payback periods, money from these sources are limited.
An added benefit however, is that these individuals may invest only to offer support to the entrepreneur without the need for returns on their investment.
Cash is the lifeblood of any business. Without it survival is highly unlikely. (Karlene Millwood)
It would be extremely difficult to start a business without money regardless of size. It would be equally difficult to maintain the business without money. A business requires assets to be operational and whether they are current or non-current assets, money is required to purchase and maintain them.
When a new business is created one of the first goals is to attract customers. Money is needed to educate the public about the products or services that the business is offering through marketing and advertising. How much money is required depends on the type of venture. Some businesses require large sums for startup, while others do not. Several world-reknown entrepreneurs like Howard Head, Estee Lauder and the Disney brothers started their businesses with meagre finances.
More and more business consultants are encouraging entrepreneurs to develop their businesses by bootstrapping. Bootstrapping or bootstrap funding is a collection of methods used to minimize the amount of outside debt and equity financing needed from banks and investors” (Ebben and Johnsen, 2006:853). Instead of using the services of venture capitalists to fund their businesses, entrepreneurs may acquire loans from family members or friends, use personal credit cards and other personal resources to start.
In other instances they may “apply for federal grants, and many bootstrappers keep their day job while getting their new business off the ground. Some also find they can negotiate delayed payment plans with vendors and landlords and make some side income by consulting”. (Spors, 2007)
Experts suggest the following five tips to successful bootstrapping:
1. Start your business out of your home
2. Think before you buy
3. Learn to barter
4. Start small
5. Be creative
Making a decision to start your business on a shoestring budget should be done with careful consideration and understanding ones personal finances will definitely help in this area. Based on personal finances the entrepreneur will know how much risk they can handle.
Self-financing your business could lead to a large amount of debt especially in the first two years of operations. The positive aspects of bootstrapping are keeping costs low and being able to reinvest revenue into the business.
While it may not be necessary during the initial stages of planning the business it becomes of utmost importance once the business plan is completed. From that point on the business will require money to sustain it if it is to grow into a successful entity.
Other Sources of Funding
Small Business Administration (SBA) Loans
SBA loans are available for entrepreneurs who are having difficulty acquiring funding through conventional means. Although SBA loans are government-guaranteed, the entrepreneur still has to obtain a loan from a bank or other reputable financial institution. These loans are intended for creditworthy borrowers who have challenges getting access to financing at reasonable rates. The beauty of this program is that once these loans have been received, the government guarantees a payback of between 50% to 85% of the total, should the business fail (CSBF, 2007).
Participants in SBA loan prgrams may borrow as little as fifty thousand dollars to as much as three million through what is called the 7a loan program. Another program, the 504 loan program, is available for businesses requiring as much as six million dollars. One of the drawbacks to this program is that the government does not actually provide the funding so it would be of little help to an entrepreneur who cannot receive funding.
The program has come under criticism lately with many questioning whether the program still remains valid. Experts think that “the loans receive no discounted interest rate (because) rates have hovered between 8 and 10.1 percent, (comparable) to regular bank loans”. Essentially then the only benefit for the borrower is the fact that a portion of the loan is guaranteed to be paid back by the government if the business does not succeed.
In addition to this, the process to qualify for the loans can sometimes be discouraging, often lasting as long as sixty days, which leads entrepreneurs to opt out and choose credit-card financing for their business.
Business Angel Networks (BAN)
Business Angel Networks are another prime source for venture capital financing. Business Angel Networks are described as “informal investors who provide risk capital directly to new and growing businesses with which they have no prior connection”. (Harrison and Mason)
Business angels are most likely to invest anywhere from fifty thousand dollars in the UK, rounding out at a
quarter of a million to a maximum of one million dollars in other parts of the world; a bit shy of the three million
promised by SBA loans. As with any other investor, BANs have their benefits and constraints. Some benefits of using angel networks are:
They are a conduit for introducing potential investors and entrepreneurs.
Research has indicated that there are more angels than opportunities to invest in. This seems to be a case of either the investor not knowing about the opportunities or the entrepreneur not presenting the opportunity in a palatable manner to get the investors’ attention. Not only do angels provide money, but they also provide time and much-needed advice to entrepreneurs.
Some constraints on BANS are:
High risk and therefore require a high return on investment. Potential investors demand a return more than ten times the investment within a five year period. Potential deals have to meet specific criteria funded by an angel investor could mean
giving away a part of your business, since some investors may want to join the Board of Directors or take on a management role (Baker, 2007). Timmons and Spinelli expound that “an entrepreneur may give up 15 to 75 percent of his or her equity for startup funding”.
Despite the source of financing used to fund the venture, Timmons and Spinelli advise entrepreneurs to do their homework before choosing a venture capitalist. Ideally, entrepreneurs should be looking for investors who:
Have adequate capital and are looking for new proposals
Are interested in startups
Have intimate knowledge of the market being entered
Can provide much-needed support and resources at this stage
Have a successful track record with more than 10 years of experience to show.
In the end, it is better to choose someone who has a real interest in helping the business succeed than one whose main goal is to obtain high returns on the investment.
Setup a bank account for your business
Make sure it's separate from your personal accounts.
Never mix your personal and business finances. Keep them separate for tax purposes
Ensure that your business is registered the best way for your tax benefits i.e. corporation, limited, non-profit, etc.
Consult a business lawyer or accountant if you are unsure which to choose.
Always set aside a minimum of 10% for marketing and advertising every month
Setup your website so that customers can purchase online.
Make sure the right integrations are attached (Paypal, visa/mastercard, other)
Add taxes to your prices.
Many entrepreneurs fail to do this and leave a lot of money on the table.
Set your prices based on what you KNOW you're worth, not on customers perceived budget.
Trust your gut, but don't be greedy. Be confident. When you know your worth, others will recognize it too.
Offer payment options for higher priced items.