written by: Navic Deka
"If you would know the value of money, go and try to borrow some."
- Benjamin Franklin
Only if you have a strong foundation in place will you be able to obtain the funding necessary to accomplish your ambition; any lender or investor will want to see that those parts are in place. This foundation is equally crucial whether you want to self-finance the firm through savings, credit cards, or some other strategy because it is the cornerstone for building a small business that will last.
There are a ton of different sources of funding, which is fortunate because it's quite rare that you'll get all the money you need in one location. Perhaps you'll mix your own cash savings and credit card debt with an SBA loan, an uncle's gift, and a gift. The future? Finding the money to support the goal is never easy for an entrepreneur, but it is a necessary aspect of the job. Yes, it will be difficult, and you could feel defeated and you might not raise as much money as you would like, but keep in mind that many new business owners have obtained the funding to launch their enterprises; if they could do it, you can too. Hold on to it. You can do it if you have a decent idea and a sound plan.
The great majority of small enterprises are launched with at least some of the owner's own capital. In fact, even if you are considering bringing in outside investors, the majority will expect you to share some of the financial risk. Yes, it's unsettling to consider using your resources for an unproven business idea, but keep in mind that an entrepreneur is someone who is ready to accept a financial risk in order to gain money. So, putting some of your own money at risk is a requirement of the job.
Where did you get that cash from? You will need to spend at least portion of your savings. See whether you may get an advance on any inheritance you could receive in the future. Many brand-new small business entrepreneurs use their 401(k) or IRA savings; damn the penalties, let's go full bore. Consider selling your stock portfolio if you have one. If you want to make your goal come true, you will probably need to be imaginative and a little bit brave.
The use of home equity is a different choice that I much less favor. Yes, that happens frequently, but it is not wise and ought to be avoided whenever feasible. Why? You are aware that a home equity loan is a loan that is backed by your residence. Your home is at stake if your wager is unsuccessful or if the company fails. How will you repay that home equity loan if the firm fails and money becomes scarce? What will happen if you are unable to do so? Remember what I mentioned earlier? Savvy business people take the least amount of risk feasible. It might be unreasonable to put your house at risk.
The use of a credit card is an additional well-liked method of starting company financing. Nearly half of all businesses use credit cards to aid with their initial costs, according to one survey. Again, it is simple to understand why this is a well-liked option. Credit cards are widely available and have the option of installment repayment. The issue is that it is quite simple to accumulate excessive credit card debt. Some words of caution are in required before you start running up the cards, charging that new computer and workplace furnishings.
The Credit Card Trap
One of the most frequent financial issues that small business owners deal with is excessive credit card debt, which can be a significant cause of small business failure. Many of us have experienced the credit card trap firsthand. You are aware of that, right? using credit cards or cash advances, being saddled with a big load, making the bare minimum payment each month, and watching the interest accumulate to the point that the balance is never paid off. It is a trap because it keeps your small business out of balance by trapping you in a situation from which it is tough to escape.
Let's imagine, for illustration, that you bill $7,000 to launch your new company. Appropriate, no? Assume, for the sake of argument, that your interest rate is 17%. (this is a credit card, after all). With a minimum payment of 2%, how long do you think it will take you to pay off that balance? 3-year period? Let's try some math. On a $7,000 loan, $104 in interest is paid each month at a rate of 17%. Your balance will be $7,104 next month after adding it to it. Your minimum payment is $142, or 2% of that sum. It will take (get ready for this) more than 40 years to pay off the total sum if you merely make the minimum payment. Don’t worry, it gets worse. You’ll also end up paying almost $14,000 on your $7,000 balance.
Credit Card Smarts
One of the worst things that can happen to your new small business is getting buried under heavy credit card debt. If you do decide to utilize credit cards to help finance your company, you must make every effort to pay off the bills as soon as you can. This is how:
Pay more than the minimum. The first way to avoid the credit card trap is to pay more than the minimum payment due—as much more The Money Hunt 63 as you can afford. In the foregoing example, the 2 percent minimum payment amount will go down every month as the principle decreases. However, if you keep paying the original minimum payment of $142 instead of the new, lower minimum, you will cut the time it takes to pay off your credit card debt from 40 years to about 5 years.
Do the balance transfer dance. One of the easiest and best methods of lowering both your monthly credit card payments and your company’s overall credit card debt is to transfer the balance on cards with high interest rates to cards with much lower rates—say, 4.9 percent. Look for introductory teaser rates.
Even the best small businesses might fail due to credit cards, despite their usefulness and convenience. If you must use them to finance your startup, do so with a strategy to pay them off as quickly as feasible.
The Family & Friends Plan
Finding friends and family members who support you and your idea and are prepared to invest in your new business is the second most popular way to raise money for a startup. Once more, here is where a business plan will be useful. Your chances of convincing potential investors to invest significantly increase if you can present a plan that makes sense. This method has the advantage that friends and family frequently lend money or make investments at zero percent or very low interest rates, which makes your job much simpler. Capital must be treated with extreme regard, if not hoarded, especially in the start of your business. Your overhead must be as minimal as feasible; low interest on debts helps, and that is why this can be an attractive option.
Of course, the risk is that most small firms don't succeed as Trivial Pursuit does. It is much more likely that you will establish a prosperous company that gives you independence and a decent standard of living. But if that doesn't happen, if the firm doesn't take off, it's not fun to owe money to friends and family for a failed business effort. It's been warned that you.
Banks & Credit Unions
Lending money to a brand-new, unproven startup is one of the riskiest investments a bank or credit union can make. Collateral is used to secure both home and auto loans. Loans to establi