Once you have established what your business is going to be and what product or service you are going to sell and to who, the next step is to figure out where the initial investment in that business is going to come from. The first thing to do is look in the mirror! You have to have enough confidence in your business to invest in it yourself or you can't expect anyone, including government sources or banks, to invest in it.
When you approach government sources, such as the Small Business Administration (SBA), banks, or equity investors, one of the first things they will ask is how much money you have put into the business.
Chances are, you don't really know what money is available to you for your personal investment in your business until you do a personal inventory of your assets and liabilities (see table below). You may find that you have assets in the form of savings accounts, equity in real estate and vehicles, recreational vehicles, valuable collections, and investments. You can sell some of these to get cash for your business and use others to get collateral in order to get a bank loan.
Using Your own Money to Finance Your Business
Get a Home Equity Loan to Finance Your Business
If you own a home, you can possibly use your home to get a home equity loan, based on what you've already paid on your mortgage, and use that money to finance your start-up costs. The money you can get from a home equity loan varies from person to person, but it could be substantial. Interest rates are relatively low and the interest you pay on the loan may be deductible on loans up to $100,000.
Just be aware of what a home equity loan actually is. It is a second mortgage. If you cannot pay it back, you can lose your home.
You can use a credit card to get money to start your business. This is certainly not a recommended method of financing since credit card financing involves high interest rates that can randomly increase, at least until July 2010 when the Federal Reserve has put a curb on credit card interest rates. However, there have indeed been small businesses started using credit card financing.
Financing Your Business Using Life Insurance
If you have a life insurance policy that builds up cash value, you may be able to borrow against it. The interest rates are reasonable and you don't have to pay back the money. The amount you borrow is simply deducted from what your beneficiary receives when you die if you don't pay it back.
Use Your Retirement Funds to Finance Your Startup
You can borrow funds from you Individual Retirement Account, or more than one of them, for 60 days only. The downside is that if you keep the money one day over 60 days, you will owe a 10% penalty and taxes on the money.
If you are still currently working at a full-time job and starting a small business in your spare time, you can borrow money from your 401(k) retirement plan. You will need to talk to your plan administrator for the details. You can usually borrow about $50,000 at around 6%. If you lose your job or quit your job, you have to repay the money, usually within 60 days.
Family and Friends
Accepting Loans from Family and Friends
Business loans from family and friends can be complicated. Emotions get in the way. That's why, if you accept money from family and friends, you must treat it as a business transaction. You need to have a lawyer draw up a loan agreement spelling out the terms of the loan specifically, including repayment provisions. If the loan is for a large amount of money, you might want to consider taking on the person making the loan as an investor and giving them some equity interest in your business. Then, as your business grows, so will their investment and the return on their investment.
In reality, business startups are usually financed using a number of sources, including self-financing and financing from family and friends, among other resources. The Your Net Worth Sheet included in this article will help you determine what you are worth in terms of assets and liabilities. Determining your net worth will help you find out what assets you can use to invest in your business.
If you complete the following Net Worth table and calculate your Net Worth, you will see that if A - B is positive, you have some money to contribute to your new business! If A - B is not positive, you may be able to pay off some debt or borrow from family or friends to start your business.
Your Net Worth
|Cash and Checking|
|Savings Accounts & CDs|
|Bonds & Stock (Market Value)|
|Insurance Cash Value|
|Current Monthly Bills|
|Credit Card Bills|
|Net Worth (A-B=C)||C||$|