The Three Actions Essential for Starting a Business Part III: Financing the Dream

Financing the Dream

The last item that’s needed to make your dreams a reality is financing.There are several sources you can tap into for the purpose of starting your business.When I conducted my research on this subject, I was surprised how much free money is available for entrepreneurs.I found the following sources that will help you finance your dream:

1.Private investors

2.Patrons

3.Peer-to-peer lending

4.Grants

5.Bank loans

6.Home equity/lines of credit

7.Title loans

I believe it’s essential to have a sound business plan in place to present to any potential investor.This holds true for private investors as well.If you ever try to obtain financing from private investors, such as friends, family, and other key associates, they want to know that you are serious about your success.Your success means that they will get a return on their investments.I suggest that you ask private investors for financing in a professional manner.Have a formal presentation highlighting the core aspects of your business plan.Make sure you provide them with a copy of your business plan and have them sign a nondisclosure agreement, so your plan doesn’t end up in the wrong hands.

Before I get into patron financing, I want to examine the word patron.According to the dictionary, a patron is “a wealthy or influential supporter of an artist or writer…one that uses wealth or influence to help an individual, an institution, or a cause.”I was absolutely blown away when I discovered that there are wealthy individuals who help small businesses, by providing them with start-up money.Do you find this hard to believe?Well, let me validate this argument for you.One of my favorite reporters on CNN, Christine Romans, recently did a story on alternative ways to fund a small business.Being the independent hustler that I am, I perked right up when I heard her discussing ways to get money.The basis of her story was patron financing.There are organizations who will help you find patrons for your business, and the patrons will give you hundreds, if not thousands, of dollars to help you start your company.In return, some organizations that helped you find the funding may require you to offer them ownership in your company.The percentage of ownership depends on the organization.A few organizations require you to give them as much as 30% ownership, and some ask for a small percentage such as 6% ownership.Some of these companies simply require you to give patrons discounts on your products or services.

The organization that really fascinated me was Kickstarter.com.The company has only been in existence since 2009.It has already had 200,000 patrons, worldwide, donate over $20,000,000 to entrepreneurs.The process for getting this money is very simple.You send Kickstarter.com your business plan or idea.If your independent hustle is approved, then the company sets up a page for you with a fundraising goal.Backers of your plan donate cash, and they receive rewards from Kickstarter.com for their patronage.When I visited the Website, independent hustlers were getting anywhere from $400 to $900,000 for their plans!This was absolutely incredible.Even though Kickstarter.com is an outstanding source for patron financing, it is not the only one in existence.

Another company that I found offering patron financing was Techstars.org.The company’s operations were similar to Kickstarter.com, but Techstars.org has a limit on how much you can raise.You are only allowed to receive up to $18,000, and the company requires a 6% stake in your company.According to your hustle, 6% could be a lot or a little.It all depends on your ultimate goal for success.For a company to give me $18,000 without a loan, 6% ownership of my organization might not be a bad agreement.The third company that I found was Ycombinator.com.Compared to the other patron financers, this company has more restrictions for receiving funding.Ycombinator.com only distributes funding twice a year and offers up to $18,000 to start a business.The company also requires you to spend three months in California for an intense training course.The training course consists of classes taught by successful independent hustlers who give you the ends and outs of entrepreneurship.They also have specialists for your specific industry.If you have the time and are selected for the program, the three months you spend in California will be well worth the funding and advice you will receive.Before you decide to apply for funding from a patron financer, do the necessary research to make sure it is for you.

Another opportunity for you to receive free money for your small business is through grants.A grant is very similar to patron financing, except you do not have to give up ownership in your company to receive the free money.A significant number of grants are given out by public and private institutions for the purpose of stimulating growth through small businesses.Many companies give away millions of dollars in grants a year, but many people do not take advantage of this opportunity.Many people do not know about the grants or have the knowledge on how to apply for them.The best place to go and find out about these grants is, once again, the SBA.The SBA has access to these grants and can help you create a grant proposal for receiving funding.The money is out there, but you have to be willing to put in the effort to go get it.

The last four sources of financing require you to pay back any funding you receive, with interest.The first recommended source is a peer-to-peer lender (PPL).Receiving funds from a PPL is not the same as applying for a conventional bank loan.The borrowers are ordinary citizens looking for a nice return on their investments.The first PPL that I discovered was Prosper.com.According to Prosper.com:

• Borrowers with good credit (640+) post a loan listing and lenders invest $25 or more toward your loan

• The interest rate is fixed for the life of the loan and never changes

• Monthly payments are fixed and will be automatically deducted

from your bank account

• There are no hidden fees and you can pay off the loan early with no penalty

• Prosper loans are unsecured, fixed rate personal loans with multiple terms

The two items that really grabbed my attention were the required credit score and the use of unsecured loans.If you tried to receive a loan from a conventional bank, it will probably require you to have a credit score of 700 or higher.This is why I stressed the fact you have to get your credit in good standing.A poor credit score will hinder you from receiving a loan, even from a PPL.Since the loan is unsecured, you will not have to provide any collateral to receive funding.This means that you won’t lose your house or car if you default on the loan.Other PPL’s that I found were Virginmoney.com and Lendingtree.com.All of these companies have different terms for borrowing money, so you should research and compare different PPL’s before you decide to apply for a loan.

A conventional bank loan is one of the most difficult forms of financing to receive, especially in a recession.Banks make sure that they will receive a return on their investments, if not, you will not receive one dime from them. Again, go to the SBA for help applying for a conventional bank loan.With the SBA’s assistance you will gain access to bank funding that you didn’t know existed.These loans will normally have better interests rates, compared to you getting a bank loan on your own.Another type of funding that you can receive from a bank is a home equity loan or line of credit.For example, let’s say you own a house worth $200,000.You only owe $100,000 on your house.This means you have $100,000 in equity in your home.With this type of equity, you can go into a bank and borrow against that equity.In other words banks will allow you to open up a line of credit and use your home as collateral.With falling housing prices, high foreclosure rates, and weak banks, financial institutions are not as willing as they once were to offer home equity loans.Unless it is absolutely necessary, try to avoid using the equity in your home to get a loan.When I was laid off, I had no choice but to tap into my home equity.The last thing you want is to lose your home by using it as collateral.I know I keep stressing it, but don’t try to get a loan or grant on your own without first seeking assistance from the SBA.The organization was created by the federal government, for you.Make sure you take full advantage of this opportunity.

The last form of financing is my least favorite.If you have exhausted every attempt you can think of to receive funding, you might be able to take out a title loan on your vehicle.This only works if your vehicle is paid in full.If you have paid off your car, you can go into a title loan company, such as TitleMax, and the company will lend you money for the title of your car.Once you have paid the loan back, the company will then return your title.The only issue I have with these types of companies is the interest rates that they give borrowers.I have seen title loan companies requiring you to pay back almost 30% interest on top of the principle of the loan. They are also quick to repossess your car.If you are as much as one day late paying on the loan, they will come and repossess your vehicle.It’s a win-win situation for the title loan companies.The majority of them offer you a loan much less than what the car is actually worth. When they do repossess your car and resell it, they are more than likely to make a profit from your misfortune.If you choose to take out a title loan, make sure you can afford the monthly payments and always search for the best interest rate. Even though times are difficult, there still are ways to finance your dream. Do the necessary research to find out where the money is. Now, you have all the tools essential to starting a business. Take advantage of the three articles and continue fighting for your economic freedom.

Edgar Alan Cole, M.B.A.

Resources:

Merriam-Webster Dictionary. (2010). Patron. Retrieved November 1, 2010, from http://www.merriam-webster.com.

Romans, C. (Reporter). (2010, October 11). CNNMoney/Startups meet money [Television broadcast]. Atlanta, New York and Washington, DC: CNN.

Kickstarter. (2010). A new way to fund & follow creativity. Retrieved October 11, 2010, from http://www.kickstarter.com.

Techstars. (2010). Funding. Retrieved October 11, 2010, from http://www.techstars.org.

Y Combinator. (2010). Retrieved October 11, 2010, from http://www.ycombinator.com.

Prosper. (2010). Retrieved October 11, 2010, from http://www.prosper.com

Title Max. (2010). Retrieved October 11, 2010, from http://titlemax.biz.