As anyone who has ever even had a daydream about starting a business for themselves is well aware, one thing perhaps above all others needed is… capital.
But one factor that some may be unaware of is the fact that all avenues to capital are not equal. Far from it. There is such a thing as cheap capital. Really!!!
Most people who have an idea for a business or even already have a business, when thinking of capital, tend to look outward for sources. After all, if they already had cash on hand, they’d have probably started using it already, right?!?!
You might just be surprised at the resources you have at your disposal that you can use with a little out-of-the-box thinking. Like what, you ask???
- Real estate: If you own your home, have you considered looking into a home equity line of credit? This is just one way you may be able to leverage real estate to help bump you into the next level of your business.
- Savings: If you’ve made the habit of saving for a rainy day, first of all, good for you! No wonder you’re in business for yourself or at the very least entertaining entrepreneurial thoughts. Starting or building your business may not be the rainy day you had in mind, but if you look at it as investing, helping your savings to multiply as you put it to use, you’re still in control and can make a plan to replace those savings off the top of any profit they help you create.
- Insurance: Did you know that there are some types of insurance policies whose cash values can be borrowed against?
- Retirement Accounts: Similar to savings accounts, we generally establish retirement accounts for well, retirement, and look to other sources first when life or business requires extra cash. However, also similarly to savings accounts, retirement accounts can be leveraged and then replenished once the portion you’ve “borrowed” from your future has been utilized to create more in your asset column by growing your business.
- Etc.: How else can you think “out of the box”? The possibilities just might be as endless as your imagination! Have you already created relationships you can leverage? (No, not your in-laws or your uncle, well probably not…). Are there raving fans who know of your idea and are excited to see it become available? Are there partners in your industry who could help promote your business or make warm introductions to others? These are also assets you’ve already created and should be leveraging!
Now, if the thought of trying to use any of these feels a bit risky, maybe it’s a good time to revisit your business plans. If you’re not sure you want to risk your own resources on your business, why would anyone else, particularly someone who regularly invests in businesses?! Those types will be keenly aware of a good investment versus a risky one. That doesn’t mean they won’t be willing to invest, but the higher the risk of their capital in your direction, the more they’ll want in return from you, whether that looks like they get a higher portion of ownership in your company, some measure of control, a percentage of profit, a higher interest rate on a loan or something else. Making your company a safe and wise investment opportunity for others does the exact same thing for you as you look to resources you’ve already got on your side that you just hadn’t thought of in that light yet.
The above are some examples of the most basic level of cheap capital because you’re simply leveraging assets you already have at your disposal so they basically cost you nothing and you retain control of both the asset and the capital. Nice and cozy.
The next level of Cheap Capital you’ll want to consider comes in the form of business loans. This might look like an SBA loan, Private Money, a Traditional Bank loan or something else. You might be surprised at how many entities are anxious to lend you money, and you might not!
However, there are some important factors to take into consideration as you weigh your options.
- Your credit score: Pretty much anyone in a position to lend you money will base their terms at least in part on this magic number.
- Credit repair may be needed if you land under about a 680, but the good news is that there is credit repair if you need it!
- Your average revenue
- How long you’ve been in business
Other options in lending include new lines of credit and credit card stacking. Both of these options require discipline and will be easier to manage as they’re used to create a steady and increasing stream of income.
If you use a new line of credit judiciously and strategically, you may easily find yourself with offers for either increases in the amount of the lines of credit or decreases in the interest rate charged or both!
Even if you need to use a lump sum as soon as it becomes available, it will be worth it to stay on top of at least minimum payments, increasing them as you’re able.
If you’re not aware of the strategy of credit card stacking, it basically utilizes a good credit score, as does the option of obtaining a new line of credit, where you lack revenue and need to lean more heavily on the good faith creditors are willing to place on you based on the strength of your credit score.
Using this strategy you can end up with a fairly large total dollar amount of credit immediately available for use, and take advantage of introductory 0% interest rates.
However, if you’re not very secure in the income you can create with the initial lump sum, tread lightly with this strategy. These cards may come with high-interest rates that, if you haven’t been able to repay the balance during the introductory period with 0% interest, can become quite costly, whether you’re able to keep up on minimum payments only to protect your good credit score or are able to make larger payments but are not able to pay off the balance prior to the 0% interest rate.
Ruining your personal credit score can happen pretty easily and pretty quickly if you lack discipline and vigilance and of course, building that score back up takes precious time.
So have you heard of the term Investmentor? It’s pretty much exactly what it sounds like. Someone more interested /invested in the success of your business and who’s willing to share some “skin in the game” with you.
From Urban Dictionary, “Individual or Company dedicated to assisting the nascent entrepreneur with both the sourcing of capital for a new business venture, as well as providing a sounding board for the entrepreneur to gain guidance from their similar experiences in business.
The combination of an investor and a mentor. The investor provides capital for a business to fund growth. The mentor provides solicited guidance to another drawing upon (their) own personal experiences.
Frequently, an investor works to maximize their own rate of return on their investment. This singular focus negates others’ benefits such as the new entrepreneur’s own success in the starting of a new or innovative business idea.
A mentor provides perspective to the uninitiated from their own experiences. The mentor’s role is one of historical experience so that the apprentice does not have to fail to learn a lesson.”
An InvestMentor can invest in a number of ways but what’s important is that both parties feel good with the arrangement. Obviously, the investor won’t agree to the arrangement if they’re not comfortable with it, but by the same token, neither should you!
Some examples of ways Investmentors infuse cash into a project or business are:
- Bridge Loans
- Convertible Notes
- Traditional Equity Investments
A bridge loan is a type of short-term loan that is sometimes used until a person or company secures more permanent financing or removes an existing obligation. They’re not intended to be a long-term solution and they’re designed to create a good ROI for the investor. They often come with high-interest rates and are usually backed by some type of collateral.
Convertible notes are similar to bridge loans in that they’re a short-term form of debt, but they convert into equity and are usually related to a future financing round. With this type of financing, the investor would receive equity in the company in return for their investment versus the typical form of principal plus interest.
Traditional Equity Investments are pretty straightforward and can seem very attractive to the start-up as a simple and easy way to access that essential cash to get things going. Agreeing to give up a portion of their company in the form of shares deserves as judicious treatment as other options for accessing capital. If you’re not careful you could end up having traded more control and decision-making power once your company has grown and proven profitable than you might prefer.
Luckily here in the Unicorn Universe, we’re keenly aware of the importance of not only accessing capital for your business but also the difference that can be made choosing the right source for your company at the right time and we’re always foraging for the best solutions and the best partners to provide them!