One of the joys of presenting during Money Smart Week is learning about concerns from participants. The best questions—and answers—often come from either new business owners or the most veteran.
Q: What are my options for funding a new business?
A: You have several choices—each with corresponding advantages and disadvantages.
1. Bootstrap your business. Either save up to start or fund it out of current job income. This is the lowest risk and least expensive way to start. The tradeoff, however, is that it may take much longer to gather start-up capital—causing you to grow impatient and start while undercapitalized. (See the next question for what you should have). If you are still working a full- or part-time job, you have a divided focus that could undermine the success of your new business. Dual-tracking—doing anything else while working in your business—works for only short periods of time.
2. If you have good credit, you can fund your start-up with credit cards or home equity lines of credit. Both are more expensive options for funding. The key: get access to a line of credit before you need it! (I got a HELOC when I was still working full-time but am thankful I never had to tap into it to start my business). You can also go to a bank for a loan, but will likely have to securitize the loan with your home, IRA, 401K or other assets.
3. Another option entails asking friends and family; this comes with the obvious heavy relational strings attached. If you go this route, consider taking Deborah Price’s Money Type assessment and have a heart-to-heart discussion with your investment group to learn ahead of time what the issues might be with Uncle Fred or Cousin It.
When approaching your “tribe” a structured approach could include leveraging a crowdsourcing option like indiegogo.com. Author and Crankset Group founder Chuck Blakeman ran a very successful campaign to fund his most recent book, Why Employees are Always a Bad Idea.
Q: How do I know if I am sufficiently “capitalized”?
A: The foundation for sufficient capitalization is having an adequate emergency fund.
While you likely understand the importance of this fund, it is harder to actually set one up and maintain it!
Financial advisors tell individuals they should have a minimum of 3-6 (and up to 12) months of personal living expenses readily available in a liquid instrument, such as a savings or money market account. The number of months needed is dependent on a number of factors such as the volatility of the industry or company you work for, the number of wage earners in the family, and other such factors.
Similarly, planners advise business owners to have a minimum cash reserve of 3-6 months of expenses. (You could also choose to buy more insurance with lower deductibles instead of having as much cash on hand. Likewise, as you get more cash you may want to lower your insurance expenses by raising your deductibles). When considering how much cash you need some of the main factors to account for include:
The Uncertainties
Delayed payments from clients Accelerated invoices from vendors Cancellation of lines of credit Loss of key employees Loss of equipment Warranty or other liabilities The Inevitable
State and federal tax payments Payroll, rent, and other regular expenses Debt servicing One-time insurance charges Other sporadic payments The Opportunities
Inventory Investment Acquisition
To determine your own emergency fund number, assign dollar values to each of the above categories.
Share with us: What other factors do you think you should (or wish!) you had taken account of in your fiscal emergency planning?
Toolkit:
What’s the one thing you can do this week to start to build your business’ emergency fund?
What can you do to either increase revenues or cut expenses?
