Tuesday, February 1, 2011

Financing: DIY

Yesterday we spoke to communities, encouraging them to build coalitions to support entrepreneurs, by sharing our experience. We'll keep you updated on our progress.

But most entrepreneurs will have to secure their own financing. Two types of businesses need funding: existing business and business ideas. If you just have an idea, you will need to self-fund until you have cash flowing. Venture capitalists do still occasionally fund raw ideas, but that option is like winning the lottery. Don't plan on it.

Following are some options that are commonly used.

Credit card: this is highly risky. If your business fails, you still have to pay off the card balances, and that might take several years. That puts a strain on the business owner, and on any family relationships. But many successful businesses have been built this way. This is a recommendable scheme for SOME situations. 

Secured loan: you can use your home, your savings account, or your company cash flows to secure loans. This is less risky, but the downside is greater. If the business fails, credit card-financing means belt-tightening; personal real estate-secured financing means losing your home.  

Person-to-Person loans, some examples of which are:

The Nauvoo Commuter philosophy encourages what is called bootstrapping. You use your own resources to start out, then use cash flows to fund growth. When your business has proven it works, then banks will talk to you (if you need a larger loan to scale your operations up.) You won't be the first person to try this. You won't be the first person to succeed this way. 

If you won't invest your own personal savings in your business, how can you expect the bank to invest? If you won't invest your own personal savings in your business, then what will you invest in: will you leave it in the bank, which means investing it in other people's businesses? If so, you don't believe in yourself or in your idea. 

Just remember to continually assess risk. 

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