Entrepreneurship 101: Money And Financing
Some time back we shared an article about why you might consider acquiring a franchise business. In part of that article we asked a series of questions that anyone thinking about a business, franchise or otherwise, needs to consider. In this series, Entrepreneurship 101, we will examine each of those questions in greater depth. The first question asked in that article was:
How Much Money Do I Have to Invest?
There are two ways to look at this question. You can take the “I” literally, and look at your own assets and financial instruments and go through various calculations, along with your accountant, attorney, trusted advisors, and family as to how much of your net worth you are willing to put “at risk” for your new business investment. It goes without saying that you shouldn’t risk all of your net worth in getting into a business. This has nothing to do with a lack of belief or passion but rather everything to do with a lack of prudence. Smart investors always watch for the downside, and buying a business is no different. Market forces, regulations, and unexpected circumstances can all contrive to destroy all those neat numbers you’ve lined up on a spreadsheet. Conversely, don’t be too penurious: you can’t hedge away all risk.
You could also look at “I” more holistically, meaning, who do I know who might be willing to invest in or with me in this idea, thereby augmenting my own contribution, either lessening my risk or increasing the opportunity I can be involved in. The classic formulation for those who can help you is “friends, family, and fools,” which is the usual crowd if you are an unproven quantity: meaning you’ve never owned a business before. Great success in the corporate world may be a good indicator of the possibility of success in business ownership, but it is a far cry from a guarantee. Make a list of everyone you know who has the money or can introduce you to someone with money, and would simply be willing to hear you out. Don’t worry about whether someone is going to say yes. It’s good practice to simply go through the motions and practice of pitching and asking, even if there’s not a chance – and keep in mind that there are plenty of people who’ve said, “I’m just hearing you out as a favor to X,” who end up putting their X on the dotted line! Stay optimistic: you need that quality as a business owner, believe us.
Finally – you can leave “I” out entirely and look at what the marketplace has to offer in terms of loans and grants. In a certain way, there’s never been a better time for this. The 2008 worldwide financial crisis made the banks that survived stricter in their scrutiny of applications, but it also birthed an entire alternative finance industry, be it in disruptors like Transferwise or alternative currencies like Bitcoin, as well as companies like Kabbage or Lending Club that have managed to flip the script: by handing out smart and successful loans to small businesses outside of the oligopoly of the traditional banking system, they now have those banks coming to them to get in on the action, wanting to invest some of their own assets in these vetted loans or to buy some of those loans outright.
There’s also the possibility of grants if you’re filling a need in your locality or region, or even if there is national money available in the niche you are trying to fill. There’s crowdfunding, and recent changes in American law have allowed companies like Crowdfunder to go beyond what Kickstarter and Indiegogo do, which is to go beyond allowing people to simply purchase products and instead allow for them to participate in equity crowdfunding. Indeed, your franchisor may also offer some financing options.
Ultimately, whatever “I” you are thinking about when it comes to financing your business, it all starts with you and a solid personal financial base. Without that, it will be hard to succeed in any type of business. This doesn’t mean you have to be very wealthy to start a business, but it does mean you need to be stable.
Have you found any forms of financing that worked well for you or for friends you know personally? Please share in the comments.