Finding the Money
When do you start to find funding? As soon as you’ve completed the budget for your new venture, begin to map out where the funding will come from. You shouldn’t be starting from an entirely blank slate here since in your budget drafting you’ve identified the funds you’ll need and you should have made some rough assumptions about the feasibility.
With a budget in hand and hope in your heart, you’re ready to fund your dream. Here’s what you should keep in mind:
- The primary source, ideally, is your own money. However, do not put all of your own money into your new venture. You have to live your life, for which you’ll need dollars. And in case the venture is not successful or takes longer to materialize, you’ll need reserves.
- The next tier are ‘family & friends’, who you know well, and vice versa, and you can trust do not want to get actively involved in your project. Rather than having them invest in the capital, borrow the money from them at ‘soft’ terms, that is low interest and long repayment terms. But always on a ‘business like’ basis.
Try to avoid outside capital investors who will ask for a say in running your venture, unless you want to give away part of the ownership from day one.
- Be sure any “outside” money does not have to be repaid too soon, that is before you have had a real opportunity to earn enough from the venture to start paying interest, repaying loans, dividends or even capital.
- Have ample cash flow. In many ventures, the operating costs (“working capital”) represent the largest funding requirement. This includes paying salaries, rent, inventory and suppliers—and often before your customers have paid you. A good rule of thumb is to have a buffer of 30% between what you calculate you need in cash flow and your actual funding sources.
- Tie funding to long-term assets. If your venture requires major assets like real estate, machinery, and equipment, or “intangibles” such as the use of patents, start by trying to find funding through these assets. For example, long-term leases for equipment and mortgages for real estate.
- Lastly, be sure when you add up all your borrowings, short-term or long-term, mortgages and lease obligations, you are not under financial water. Fund at least 25% of your assets with long-term capital, including your own money. This is true capital and money that does not need to be repaid.
And, truly last—perhaps most important—remember the Golden Rule: do not build a house using your credit cards!