I just read a piece on cnnmoney.com titled “8 Places to Get Financing”. They are discussing alternative routs to take in order to secure financing for your business when the traditional commercial banks say “NO”. But, they seem to leave out the obvious and most practical option, especially during our current recessive economy, personal savings, and keeping it free and cheap. Its because of articles like this that our country is in the predicament it is in now.
Everyone wants to push that as individual citizens, we need to tighten our belts and cut back. But for some reason, that philosophy doesn’t seem to translate to business, as it should. If we begin running our companies as we are beginning to do with our personal finances, with cutting up credit cards, paying off debt, saving and paying ourselves first, cutting back, farming alternative spending options and sticking to a budget, not only will our country’s economy be more stable, but your business will be built on a more solid foundation.
The goal here is to not grow fast, but to grow strong. For example, if I grow extremely fast as a basketball player, and by the time I graduate high school, I am 7 feet tall and 200 lbs dripping wet, chances are, that I will go pretty low in the Nba draft and my professional career will more than likely be pretty short unless I begin to put on some weight, do some lifting and get strong.
On the some token, don’t wait until you are in the game to try to take steroids and get muscular quickly either. Build your company from the ground up, the right way from the beginning. With solid finances of 100% equity ownership, low operating costs, and zero debt.
The 8 alternative options that cnnmoney offered us entrepreneurs include credit unions, microlenders, friends and family, factoring, venture capitalists, angel investors, credit cards and grants. Now that we have these options listed, let me break down the cons of each and every one of these less than stellar alternatives.
For the purposes of your business loan, credit unions work the same as a commercial bank. You are not gaining anything by going this rout. And most credit unions don’t even offer business accounts, let alone business loans. So your chances here are slim to begin with, and its still a loan. My advise, shy away from debt at all costs. Believe my, I’ve worked as a loan officer in both commercial banking and credit unions for 3 years doing these very loans. And now I am a credit analyst on top of being an internet entrepreneur. I told you to keep your day job.
Microlenders are few and far between. So good luck on finding one. On top of that, they are a basic alternative for those with less than perfect credit, as their lending requirements are less stringent. In my opinion, this gives that much more reason for you as an entrepreneur to save your money and utilize other options that don’t involve getting a loan and going into more debt. Especially from a lender that have higher than normal rates to begin with.
As a banker by profession myself, the lending system is structured in backwards fashion to begin with. Those whom need funding are those whom have less than perfect credit, and that’s why they need they funding. But at the same time, those same people are the ones who cannot qualify and get funding.
Therefore the only way for you to get adequate and fair lending as someone with lower credit, is to activate other alternatives to get business done without spending money all together, and to save money and be strict with finances and build that credit worthiness. Going the microlending route is a desperate and uneducated move. But now that you know, you can avoid that mistake.
Friends & Family
CNNMONEY.com states that this option is fast and low-cost. I don’t believe it. This has never been the case and never will be when borrowing money from family. Think about it. Have you ever borrowed $5 from Uncle Paul or Aunt Suzie? Mom or Dad, or especially a sibling? Yes they may give you the money quickly because they love you and after all you are family. But they are going to also want that money back fast too. Especially during this current recessive economy we are in.
If your family member lender gets into a financial bind, rest assure that they are coming to you first because they all of a sudden remembered that money they loaned you and your company. Borrowing money from family is always a bad idea. Its like feeding a stray cat. You will never be able to get rid of them. They will be hounding you forever and will eventually want to over step their bounds and get involved in your business venture. Watch and see. You may not pay interest in this situation, but this option is far from a low cost option.
Factoring is when you would sell your accounts receivable to gain some additional capital. This option is a joke. You are giving up your potential income for a fraction of its worth, and you loose on the residual income from the sale and all the hard work that you did to generate the business and close it.
This option is expensive and worthless. Never give up your sales and your clients unless you have reached that often sought after major payday when you sell your company to a large conglomerate for millions, or even billions. Checkout the Mike Michalowicz interview and get informed.
Venture capitalists/Angel investors
We don’t have to continue to go over this one. The only time when its a good idea to go this route, is after you have build a strong company with a solid plan and foundation, client base and are profitable, and all you need is an influx of cash for growth purposes.
Checkout the other blog posts on this topic, and read the “Toiletpaper Entrepreneur”. http://www.toiletpaperentrepreneur.com/
Now, if you need money, why would you think it would be a good idea a max out your personal credit cards to support your business venture? Now who’s going to pay that additional bill? You can’t, because hopeful if you had the cash on hand, you would use that to fund your business, and your company can’t because it needs money to begin with. This option requires a high interest cost, and should not be used. This is why the country is in the financial health that its in now. Don’t spend what you don’t have. Period. If that’s the way you are supposed to run your personal finances, then is good enough for your company’s as well.
What people don’t know, is that mostly all grants are designed for only non-profit organizations and existing companies looking to take advantage of a specific qualification guideline. For example, to create a new division or program that services a particular group of customers or geographic area. As startup entrepreneurs, this does not apply to us. So don’t waste your time trying to learn how to write a 50 page grant proposal.
Stay tuned for my 8 alternatives to get your company off the ground the right way. And none of them require you to go into debt or give up equity in your company.