ET25- Q&R Types of Funding Available for Small Businesses

What Kind Of Money Is Out There and What’s The Best Kind For You

Starting a business takes money, even if it isn’t much depending on what you start. Of course, some kinds of businesses require lots of capital and continue to suck it down quickly as they grow.

In this episode I break down the various kinds of capital actually available and dispel some myths about the kinds that aren’t. I also give some specific advice on what I think the best path is and how much you should invest and where to get the funds to start.

I firmly believe if you follow this plan you can not only never fail but you will also learn lots and pretty quickly succeed, even if it isn’t exactly what you first envisioned.

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Listen right here:

Transcript

Female Voice: What are the alternatives in financing my business?

Matt: One of the big questions every entrepreneur faces is “How am I gonna get the money to start the business?”
Now, the best and easiest path is to have the cash yourself. Depending on what you are starting, that may or not may be possible. My advice to most entrepreneurs is try to come up with something that’s within your own means. In other words, you’ve already got enough money to at least get something going that’s gonna prove the concept of what you want to start. If your idea requires $500,000 and you don’t have $500,000, then try and think about a way you could scale it back to do some kind of trial, some kind of test of your concept for as much money as you are willing to risk that you personally can already get your hands on = because it is very difficult to got out and try and get money for a new business if you have no proof of concept, you have no track record, and you don’t have enough money to put in. buy-in large is the best thing you can do. If you’re new to being an entrepreneur, if you’re looking to start a business, is to start something that’s within the realm of the money that you already have. If you think there’s no business you can start with the money you already have, then, let me tell you. You’re wrong because there’s no shortage of business you can start with very little money. There’s actually a book out there called The Hundred Dollar Startup. Not that all the startups in there are under a hundred bucks, but the idea is there’s a lot of businesses you can start for very little money. My business, CapForge, when I started it, I literally had nothing but a website and some business cards. My all in costs on the whole thing was well under a hundred dollars. Now, we are a much bigger business but that’s all it took to get started. I have a guest on the podcast earlier, Matt Shelp. He started his painting business with $300. He’ since grown into a multimillion dollar business in just a number of years, not very many years. But that’s all it took to start. If you’ve got even a few hundred bucks, even a hundred bucks cash in your pocket, you’ve got enough to start a business. It may not be the business that you’ve been dreaming of. If you always dreamed of owning your own hotel or having your own cruise ship line, alright, that’s not gonna happen. But you already know that. So if you’re serious about being an entrepreneur, look at how much you personally have, see what kind of business you can start with that and work your way up. If you’re like Matt Shelp, or me, or tons and tons of other entrepreneurs, you’ll be able to grow that first business that you start with minimal amount of money into something big enough that you can start looking at bigger businesses – bigger and bigger and grow and get to the point where you’ve got enough to get just about anything. Mark Zuckerberg started Facebook with the desktop computer that he had in his dorm room. You don’t need a billion dollars to get to a billion dollar business. Not everybody is gonna turn into Facebook, obviously. But there’s plenty of opportunity just using the cash that you have or you can get from working a part-time job or you can get from selling the stuff, some of the stuff that you don’t use anymore on eBay or Craig’s list or whatever, that’s plenty of money to start a legitimate money-making business that can quickly build up to a point where can support you as much or more than whatever full-time job you could get most likely. That’s the first place to start. If the cash in your pocket doesn’t quite cover it, the next place to look is credit card. That’s the easiest way just about anybody can get their hands from a few thousand to maybe five figures, mid five figures in financing. No questions ask. The credit card company doesn’t ask if you’re using the money to start your business. They don’t care about anything but whether or not you are credit worthy enough to get the card in the first place. Then, you got to make your minimum payments to keep the card going. But the credit cards, other than having your own money in the bank, are the second easiest place to look. Beyond that, if you own a home, you can pull out a home equity loan and depending on how much equity is in your home, that maybe something in the order of 5 to 6 figures of money that you can pull out relatively easily, relatively no questions ask. It’s a little more documentation, a little more work, a little higher interest than some other options but probably lower interest than credit cards and that is the way that you can tap into it. so, those first 3 things, your own money, credit cards, home equity loan if you got a home, that’s money you can get your hands on pretty much no questions asked to start a business. I, again, recommend not starting anything bigger than what you can finance out of your own funds, out of your own pockets, without going into debt, without borrowing. That’s the best way to start because there’s a good chance that whatever you try the first time isn’t gonna work and you don’t want to go into debt and spend the rest of your life paying off your own failed attempt. Start small. Try something. If it doesn’t work, save up some more money and try the next thing or try the variation on the first thing or whatever it is until you hit it right. You may take 3 or 4 trials. If you only spend a couple hundred bucks per try, then by the fourth try you’re only into it by $800. That’s a very reasonable amount to be able to recover from. If your first try is $250,000 and that doesn’t work out, you’re gonna have a real tough time paying back that $250,000 just working on your regular 9-5 job. That’s my recommendation. Finance whatever you start with whatever you have and let that amount that you have to invest be the deciding factor in what you start not so much necessarily what your dream business is. Work your way up to that if you don’t have the funds to pay for yourself. Now, if you really are set in your idea and you don’t have the cash to do it and you don’t want to go into debt or not real debt anyway, the next step is friends and family. If you can convince your friends or your family to loan you, I strongly suggest you make it a loan so that you can pay them back and you can still be the full owner of your business rather than have them as investors who are gonna want to tell you how to do things and what to do, what not to do. If you do become a big success, they’re gonna want their piece of the pie and that might be a bigger slice than you think. You know, they could loan you $500 and you turned it into a big business. Three years later, they come back and want to you to give them a hundred thousand dollars for their 20% or whatever. That may not be something that you want to do. So, I strongly suggest that if you do take money from friends and family, structure it as a loan. Make regular payments back to them. If the thing goes out, well, work hard to save up money to pay them back so you can stay on good terms and not have any awkwardness. But, make it a loan not an investment. If that isn’t enough or if the business you want is something bigger than friends and family willing to loan for, you do have a couple other options but they are very restricted. If you’re looking to buy a business with a proven track record and positive cash flow and you got some experience in that industry or related industry, the SPA can be a good source for loans to buy an existing business. But again, they are very restrictive. It’s a very little interest loan. It’s generally paid over 10 years and you’ve got to come up with 10% – 20% down. So, if you have zero cash, an SPA Loan is probably not gonna work for you unless you can get somebody to loan you separately to startup down payment that you need and structure it in the way that’s okay with the SPA. If you got an existing business and you need money to either buy a building or buy equipment or expand by buying more inventory, an SPA loan maybe an option there. But again, you have to have a good long track record, positive cash flow and be clearly able to make the loan payments for them to even consider it. A lot of people are under the impression that an SPA loan is like free money from the government. It’s not the case at all. SPA Loans are actually given out by regular banks. It’s just that the government will guarantee up to 80% of the loan. That’s why the bank wants you to come up with the other 20%. In that way, they are 100% covered – 80% by the government and 20% by you – and they get a pretty disinterest rate on. So, if your situation works for an SPA Loan, it could be a good thing. But it’s a limited number of situations and it’s not what most people think which is that anybody can go on and apply for an SPA Loan ad get one. The other option for startup cash is Angels or VCs. Angels are usually small money investors and Venture Capitalists (VCs) are larger investors to larger amounts. Again, this is a very narrow subset of businesses that would even qualify for VC or Angel Money. The requirement is it has to be a business that can literally explode. You have to be able to go from whatever the startup investment is to a 100x that value. In other words, if they give you $3 million, your business needs to be able to be worth $300 million in a fairly narrow time frame like within 4 or 5 years. So, if you don’t think your business can get there, they are not gonna be interested which pretty much rules out 99% of businesses. Anything that could be considered as Lifestyle Business or an Owner-Operated Business like a restaurant or a service business, law firm, massage business or whatever, if it’s not tech-driven, if it doesn’t have the ability to explode and go public and generate huge returns, these investors simply are not gonna be interested. They are also not generally interested in random inventions or anything outside of the technology space or bio-tech. they don’t fund real estate investing or other ideas like that. There are investors who do those kinds of deals but they are not generally venture capitalists or angel investors. So, outside the scope of this discussion, really to get farther into what is and what isn’t a VC business, but if you’re not sure, then figure you’re probably not. Once you’re in business, there are some other options for financing. The easiest and lowest cost is probably getting a line of credit from the bank. Again, you need to have a good track record and positive cash flow. If your business doesn’t necessarily need to borrow but you’re in a good place, you might want to get a line of credit in case things ever get rough or you need to expand because as soon that you’re in any kind of trouble, they are not gonna give you a line of credit. But if you already established one, they may not take it away or at least not until you start pulling money from it. Line of credit is a good, relatively low interest option for business if you’re already existing. There are other options like factoring and credit card loans, high rate signature lenders, but in some cases, those can be good options. In other cases, if you’re borrowing from them, it’s probably because you’re almost underwater and paying their interest rates and meeting their loan terms maybe what pushes you under. So, think very carefully about exactly what you’re gonna do with the money you borrow and if you’re gonna be able to turn it into more money that you can use to pay back these loans and get yourself out of the hole. If you are basically just borrowing from one to pay another, and the money is going in and then right out the door again and you’re not able to use the money to grow your business, to be able to generate more cash flows than you currently got, it’s probably not worth borrowing in the first place. On the side note, before we kinda wrap discussion up about financing, let me just tell you that there are business grants or at least – In 15 or 16 years of working with hundreds and hundreds of small businesses, I’ve never come across somebody who got grant money to start their business. I know there’s times on TV there’s pitches for free government money and grant money to start a business and you never have to pay it back. There are people who sell books and resources trying to help you write grants and trying to help you get money and others supposedly billions of dollars of government grants that go unclaimed for entrepreneurs, I’ve never seen it. If it was easy to get free money from the government, I think everybody would be doing it. I would certainly be sending in my application for free money from the government that I don’t have to pay back. The reality is almost all the grants out there have very specific purposes. There are maybe billions of dollars in grants but unless you’re building low income housing in a specific area of Washington, DC, or unless you’re opening a low income medical practice in some section of rural aeta or unless you’re working on some medical technology to stem the spread of HIV or whatever the case, those grants aren’t available. You just can go and say “Hey! I want to start a barber shop. Can I have $50,000?” They don’t have grants for barber shops in nice neighborhoods where somebody just wants to start one. The grants are for very specific purposes. They are not easy to get. There are a lot of hoops to jump through and its very unlikely that the business that you have in mind is something that there’s a grant out there for. Now, it’s possible but unless you’re more or less a non-profit or something very closely related to a non-profit, in other words, you’re serving an underserved community in some reasons the government would want to support that, there are probably not a grant that you’re gonna get and I wouldn’t waste any time chasing around, looking for grants or applying for grants or giving people money to tell you about grants that you’ll never gonna get. So again, I come back to there is money out there for businesses. There are ways to finance things beyond what you can do. But, for most people, in most cases, the best way to start a business is to start it with the money you already have which means coming up with an idea that you can fund and start with just the money you’ve got in your pocket or maybe you and 2 or 3 partners can scrape together out of your own resources. It’s the least painful way to deal with having something not work out because at least you’re not in debt and at least you haven’t spent ton of money on it and for the least amount that you can spend to start something up will give you the most chance to then turn around or try it again or try something else or pivot what you’ve got to a different direction because you don’t have so much invested going down a certain path that ends up not working out. So, start with what you got. Grow from there. Re-invest the money if your business is successful. You can re-invest it in that or invest it in a different business or sell it and do something else. But the best financing is the financing that you got personally available. Then, as a second follow-up, all the other sources I listed in the order I listed them. But for my money, the best option is to do it yourself. Just like pretty much the rest of entrepreneurship is doing. Do it yourself. Certainly learn from other people. Take advice. Educate yourself but at the end, you kinda rely on what you can personally do and provide and put into it. I hope that helps and thanks for listening.