Everyone has good ideas. Some of them may even be million dollar ideas, but if you live from paycheck to paycheck or way beyond your means, you may never be able to quit your job and start a business.
As the Smallbizlady, often I get emails, facebook messages and DM’s on Twitter from people asking me to help them start a business. My first three questions are usually something like this.
- What is your business idea?
- How much money do you have saved?
- How much money do you think it will take to launch this business?
If question two brings on a case of stuttering, I start shaking my head.
You should have three pools of money before your start a business.
- An emergency fund for the household
- 12-24 months of budget to run your household
- 12-18 months of money to launch and operate the business.
Now hear this, “Your ability to save has everything to do with your ability to start a business!”
Money is not everything. It’s just a tool, but it is certainly the beginning of a business plan. Banks rarely, if ever, loan money to start-up businesses. Banks will typically not deal with you for a loan or line of credit until you’re been in business 2-3 years and can show growth in the business with your financial statements and business tax returns.
There are some franchising opportunities that will provide some working capital, but 30-50% of the money will still come from you. And by the way, you will need to have significant net worth and assets to collateralize the loan. Think of it this way, no credit = no business. When you are first starting out in business, you are your business’s credit.
So what do you do if you have a great idea and no money? There are other sources of funds to start your business. There’s the 3 F’s Family, Friends, Fools. Your family loves you and hopefully believes in you enough to invest in your business. If you are fortunate enough to have a family that can afford to invest in you– you are fortunate, but beware. Your rich Aunt Sally may think she’s your boss and might call you up every 30 days to check on how her $50K is doing. You may not want that kind of pressure in your new business.
Then there are your friends. Nothing can kill a friendship faster than borrowing money that you can’t pay back. I have a rule. I do not loan money to friends, I give it to them. I make sure that I do not give away any money that I can not afford to lose. Would your friends do that for you? If so, they could be an option.
Every once in awhile, a hungry entrepreneur will come across a rich guy who’s an idealist about business, who falls in love your idea but doesn’t wish to run the business. That is an angel investor– who will invest money in the company for an equity stake and lend his or her network to help you. Do not get your hopes up about finding an angel investor in this economy. It can happen, but let’s just say you are better off using your own funds that you save to start your business. Family, friends or an angel investor can be fools for investing in a half-baked business idea. Invest your time, to make sure you have a sound business plan before you take anyone’s money. And do have a plan to show them–for when and how you think you’ll pay it back.
If you do have assets, you are in a different situation. You can borrow against your 401K, you can take out a home equity loan, you can sell your home or rental property, you can cash in a Roth IRA. The money must come from somewhere–its best when it comes from your own coffers.
It’s essential that you start your business from a position of financial security. Otherwise, you’re finished before you get started.
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Melinda Emerson “SmallBizLady” is a Veteran Entrepreneur, Small Business Coach and Social Media Strategist who hosts #SmallBizChat on Twitter. #SmallBizChat is the trusted resource on Twitter to discuss everything entrepreneurs need to know about launching and running a profitable small business. Melinda also publishes a resource blog on small business best practices at www.succeedasyourownboss.com Her first book, Become Your Own Boss in 12 Months was released by Adams Media in March 2010.