Herman: John L. Herman Jr., Author

Funding Your Dream

So you comb through the Business Opportunity section of the newspapers and find a small business you want to buy. But you are broke. So, where does the money come from that will enable you to purchase that first enterprise? There are many ways that people come up with that first bankroll, and we will walk you through the most common methods.

SELLING YOUR HOME: When I bought my first company I offered a down payment in cash that I didn’t have. On the way home from agreeing to buy that first business I stopped at a local Real Estate office and listed my home for sale. Upon arriving home it sure was an interesting conversation with my wife…”Honey I just bought my first business, on oh yeah, by-the-way, we are moving into an apartment.” If you really want that business would you be willing to give up your home?

BORROWING FROM RELATIVES: Commonplace among business start-ups is the “loan from relatives” scenario. This includes the loan from parents, hitting the family to invest in your great idea, or squeezing that reluctant aunt or uncle out of a few bucks for your “can’t miss” idea. For every one that goes on to be successful enough to make it big and pay them back there are hundreds who not only lost money in their business endeavor, but they lost a few relatives in the process. And remember, let’s say your big idea works and you go on to pay back the loans plus ten percent interest and you are making six or seven figures a year with your little “company that could”…don’t you think those relatives are wondering why you are rich and they are not when it was all their money that made it happen? In other words, don’t use this method unless you want to rid yourself of some family members.

PARTNERSHIPS; SPREADING THE JOY: Many times starting that big idea requires taking in other people and forming a partnership. By sharing the cost you get a chance to start or buy a business you want, often overlooking the fact that you just connected yourself to an anchor that will try to sink you to the bottom before you make your millions. Once you take on a partner you have not only started a new business, you have created many new jobs for yourself. Who decides what? How are the proceeds split? Who works harder than whom? Know this about partnerships; at some point in the near future you will be wondering how to get out of the partnership and retain your big idea for yourself. So, make sure you set up at the beginning a way to undo the partnership in a manner you can accept.

OWNER FINANCING: If the seller believes in his business and you are broke then approach the purchase negotiations as if they were a job interview. Because if you can convince the owner you are the best candidate to take over his legacy, then you may be able to convince the seller to finance you on the purchase. If there are not enough assets to borrow against to pay the full price, the owner will almost always be faced with “holding paper” and financing your acquisition.

TAKE OVER BANK DEBT: This one requires you to be able to convince the sellers’ banker that you are a good risk to take over the debt now on the company and keep the credit lines in place that will let the seller off the hook. If the bank is about to take a bath on an “asset sale” and you are willing to pay more than that for the business, then the bank may gamble with you and keep financing in place so they can make more of their money back.

PARTNERS WITHOUT POWER: Maybe your idea is so good you can copyright it, or even patent the idea. And, while you will own the copyright or patent, you allow one or more partners to “bank” the deal with a contract in place that allows the company exclusive rights for some period to the use of your product or service, and therefore the partner(s) would be willing to capitalize the venture. On one of my deals I had two partners put up one hundred thousand dollars in advance and guarantee my first year salary in order to have me start that firm with them. They got my expertise and I got their funding to make my idea work. In less than three years we split up and went our separate ways, but by then I had enough to continue with my idea, funding it on my own.

BANK FINANCING: Banks lend on assets not on ideas. And they want safety by lending far less than the assets are worth, because they expect to have to sell the assets at liquidation values to recover their money. That means you can never borrow the full amount it takes to launch a venture from a bank.

GOING PUBLIC: This is not recommended for a start-up venture, but may come into play when you want to go from small-time to a national level, requiring a large sum of money, but offering great rewards for those who own stock. Not for the business novice, but clearly a viable way if your idea should be nationalized via a franchise situation or perhaps a national chain of company owned locations.

DEBT ANY WAY YOU CAN GET IT: Unfortunately many companies are started this way. Home Equity lines are bumped up to the max, putting your home at risk, but also adding to the cost as you immediately have payments to make. Credit Card debt. After all, you tell yourself, my idea can’t miss. But, how do you make those high interest payments when the monthly bills come in? If you finance the business this way, and have no savings to fall back on, then you are committing financial suicide in most cases. What makes you think any new business can make enough money to pay all of the business costs and have enough left over to “buy itself” by paying off these loans.

This is not meant to stop you from launching that venture, but at least keep your eyes open and know what you are doing in addition to starting the big idea.

• Posted: 11 February 2008
• Comments: 1
• Category: Starting a business

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