As the old saying goes, "It takes money to make money" True! and the more money you have to work with the more you can make or lose, as the case may be. Over the centuries this problem has been at the forefront of why more people have not become rich. Today, we are lucky in the developed world, in that money is readily available then ever in our history. Investment opportunities where money can be put to work is also much more abundant.
This book is about raising money to get started. Most of us have access to more money then we think we do. The problem is that most of us do not plan the use of our money, or know where we spend the money that passes through our hands. If getting rich is your goal? Then learning how to manage your money will be necessary. You will need a plan that indicates what you want to achieve, when you plan to achieve it, and how you plan to get there. You can make your plan informal or formal, detailed or vague, but it should be in writing, and referred to on a regular bases, in order to evaluate how you are doing in relationship to your stated goals.
To know how far you have come, you have to know from where you started, that means you need to prepare a personal financial statement showing your current net worth. And last, but not least, you need to prepare a monthly cash flow statement on your household. You must know where your money is going if you plan to save and invest any of it. For a personal financial statement form go to: http://www.sba.gov/sbaforms/sba413.pdf
Building An Investment Nest Egg. The first thing I learned when I tried to save for investing was that a family is most likely going to spend every penny that comes into the household. Every plan my wife, and I made fell apart as the inevitable surprise expense came up. Every time we tried to economize to reduce our spending, we ended up giving up. Here is how we finally did it.
All extra, unexpected money coming into the household went in to a separate investment savings account. Every extra dollar, tax refunds, birthday money, insurance settlements, bonus from work, over time pay and paychecks from extra jobs as well as garage sale money etc. We started this in 1978 and by 1981 we had $4,800 saved. I had a goal of $10,000 so I sold my car for $6,000 and bought an old pick up truck for $700, I then had the $10,000 I thought I needed to start investing in real estate.
Twenty-five years later we still invest most of the extra money coming into our household. Pocket change and one dollar bills were accumulated in a jar every day for those surprise expenses that ruin a budget and if none came up, we used it for vacation money. We took some of the money from our first three years savings to start a fireworks sales business to keep the extra money coming in. We ran the fireworks sales business for the next fourteen years. We worked every July 4th holiday, and Christmas/New year holiday selling fireworks. The point here is, if you want to accomplish your plan you will find a way.
Of all your monetary assets, your credit rating is the most valuable asset you have. A good credit rating, and the knowledge of how to use it to make money, is all you need to make yourself rich. Everything else you do, just makes it easier, or more difficult to make money. Protect your credit rating because once it is messed up you will spend years rebuilding it, and that time, and effort can be better spent getting rich.
Knowing how to use your credit availability is simple; you only need to follow this rule. Borrow only when the money will be used to make money. There are three exceptions to this rule, borrowing for education, for your home and for a car. Any other debt that is not for a profit-making venture is a hindrance to your getting wealthy.
Borrowing Money
Borrowing money to make money can make good sense. Be certain that you have a plan for paying the money back and a back up plan just in case things do not work out as planed. Most of my borrowing is for long-term investments in real estate, or for inventory for resale in one of my businesses.
For personal use I will borrow if the item being purchased will last longer then the payments. That pretty much cuts the list to cars, education, appliances, and home improvements. Even if I can pay cash, I might not if the money can make more then the loan will cost.
All lenders will expect you to put up collateral, and have equity in your venture before they will consider the loan.
Note: Deposit all money borrowed for investment in a separate bank account. In order to deduct the interest on the borrowed funds you will need to show the IRS that the money was used for investments and/or business purposes.
Cash Flow
Cash flow is more important then cash on hand. If you have a positive monthly cash flow, you have choices available to you. I.E. Let us say that at the end of the month you have $300.00 left over after paying all the household expenses for the month. Your choices of what to do with this extra money include, paying a bill, save it, spend it, invest it, or use it to make the payments on a loan for investment purposes.
Your plan or goals should include increasing your monthly net income from all sources so that you have money to invest (a positive net cash flow). Besides your paycheck, look for other ways of increasing the income. For example, work overtime, hold a garage sale, buy a rent house, or take a part time job.
You do not have to wait until you accumulate a lot of money to start a business, or buy a rental property. You can borrow the money and use your extra monthly cash flow to pay back a loan used for the investment. The more you increase your monthly cash flow the more options will be available to you.
Do not wait until you find an investment to start looking for the money, find the money and the money sources, and be ready when an investment opportunity comes along.
Lets imagine that you found a home for sale for $50,000 that you feel would bring $70,000 if it were fixed up. You offer to buy the house with the owner carrying the note. You get the down payment using a credit card loan check, and make both payments from your current monthly personal (income) cash flow. You fix up the house and resale it to pay off the credit card and the mortgage.
To do this type of deal you need a knowledge of the local housing market and a positive monthly cash flow from which to make the payments and the ability to get the home fixed up for resale quickly.
Once a year I sit down and make a list of places that I can raise cash from. What I want to know is what is the total cash available to me if the need or opportunity arises. My money source list includes, cash on hand, savings, insurance policy loans, IRA's, credit card limits, lines of credit, friends, relatives, my net monthly cash flow from investments and rental and a few more sources. With a knowledge of what money is assessable to work with, I know what I can do when the opportunities arises.
Existing assets
When you prepare your financial statement, you may well discover assets that have loan value. Such as your home, other owned real estate, 401Ks, annuities, live insurance polices, etc. As long as your monthly cash flow can handle the payments, these can be good sources of investment money.
Take on a business, or investment partner, only if you have no other choice. Partners are a source of money, and of problems. I use partners only when the partner is a silent investor, or the duties are separated and well defined. If you take on a partner to get their cash or expertise, you choose the only two valid reasons. Any other reason is an excuse for not assuming the responsibility of your actions. Partnership deals should be set up with a signed, detailed partnership agreement. Be sure to get both your partners and your partner's spouse's signature on the agreement.
I have used partnerships to buy real estate, and to start businesses. I have always ended up buying out the partner. When the partner is also a relative it is even more important that the details, and duties be spelled out and that a buy out plan be taken into consideration. I always turn down partners when the partner can not afford to loose their money, or when they do not meet the only two reasons to take on a partner (When I need their cash or expertise).
http://www.sba.gov/manage/partner.htmlÂ
Information at the SBA on partnerships
Credit Cards - Easy Access
Today, money is readily available via credit cards to anyone with good credit. If you can manage your money so that you stay out of trouble, the use of credit cards can assist your investment activities. Before you use borrowed money for investing you need to have a plan of how you will repay the loan, and a back up plan in the event things do not go as planned.
SBA Lender Information
The SBA web site has information on SBA loan programs and loan preparation information. Most SBA loans are bank participation loans. Under the guaranty concept, commercial lenders make and administer the loans. The business applies to a lender for their financing. The lender decides if they will make the loan internally or if the application has some weaknesses which, in their opinion, will require an SBA guaranty if the loan is to be made. The guaranty which SBA provides is only available to the lender. It assures the lender that in the event the borrower does not repay their obligation and a payment default occurs, the Government will reimburse the lender for its loss, up to the percentage of SBA's guaranty. Under this program, the borrower remains obligated for the full amount due. The preceding underlined text is from the SBA web site.
The SBA web site goes into detail as to what they look for in a loan. Most of the loans are for owner occupied real estate and working capital loans. The SBA sets the requirements that the bank must meet before the loan is guarantied thus the banks require collateral and experienced business operators. They are not a good source for start up funding. The SBA does have some specialty loan programs that might fit your business and thus the web site deserves some time.
http://www.sba.gov/financing/index.html
Below are a brief outline of the more popular programs.
SBA Express Loans: Line of credit and term loans. Loans for machinery, equipment, furniture, fixtures, inventory, working capital, and business acquisitions.
SBA 7a Loans:Â Working capital up to seven years, equipment up to ten years, real estate up to twenty five years and business acquisitions.
SBA LowDoc: Loans for working capital, equipment, machinery, furniture, fixtures, inventory, and business acquisitions and real estate. Loans up to $150,000 with less paper work.
SBA 504 Loans: For existing companies with net worth under $6 million. Other limitations apply and special limits such as the company must create one job for every 35,000 borrowed. See SBA web site for details.
Bank Loans
Bank loans are normally made to businesses with at least two years track record. Banks are Cash Flow (net operating profit) lenders, and look for profitability, collateral, and the owner's experience. Visit some of the bank web sites for an idea of the types of loans available, and requirements. Wells Fargo and Bank America are two of the national companies pushing small business loans.
http://www.wellsfargo.com/
http://www.bankofamerica.com/index.cfm?page=smbiz
Peer to Peer lenders
Go to Google and do a search for Peer to Peer lenders and you can loan money, or borrow money, from others just like you and I.
Loan Brokers
Loan brokers work on commission, and can some times put a deal together when no one else can. Never pre-pay a loan broker in advance, they should get paid from the loan proceeds. I have never met anyone who pre-paid a broker that actually got the loan. Some loan brokers have access to private money sources that you cannot find any other way. Brokers have a better chance of finding you a loan if the loan is real estate based. You may pay a higher rate of interest for broker-ed loans. The paperwork the broker will require is similar to a bank loan.
The best and safest way to locate a broker is to ask your banker friend, or accountant. Other then that, traditional sources such as trade magazines, online, and yellow pages.
Factoring
Factoring involves selling your accounts receivable. When your company ships merchandise to another company, the factor, advances you a percentage of the invoice amount, your customer then pays the invoice payments to the factoring company, they deduct their advance to you and a fee and forward you the remainder. Expect to pay about 2% of the invoice amount. Factoring is hard to get in amounts under $1,000,000 per year of billings. Each company will have its own procedures. Look for factors in the yellow pages and on line as well as most big banks.
Leasing
Leasing is a good way to finance equipment. Leasing need not show on your company's balance sheet. Lease payments speed up tax deductibility on some equipment when compared to standard depreciation schedules. With the new tax law this is less important, see your accountant for a full explanation, as each business is different.
Leasing can be more expensive then financing because of the higher interest rates, and residual value pay out at the lease end. Leasing companies are easy to find in the yellow pages and on line. Most leasing companies will want to see two years business tax returns.
Another little known problem is that personal property taxes on the leased equipments value, is added to your lease payments at the full value tax rate until the lease ends rather then at the depreciated rate. For example: If you lease computers you are paying taxes in year three, at the same rate as year one, as if the equipment is still new, even though the real value after three years is closer to 20% of what you paid. When you fill out a county tax inventory value request do not include leased equipment as you will pay taxes twice on the leased items.
Vender Financing
Most manufactures who sell merchandise for resale will give terms of net thirty days, and on seasonal goods as much as six months. Keep in mind that short-term money like this is risky if the products do not sell, or you do not practice very good money management.
Floor Plan Financing
Some manufactures of high priced goods will have longer term finance deals or floor plan financing worked out with companies such as Textron corp. Floor plan finance companies lend on large, high ticket items with serial numbers that can be tracked. Examples are R-Vs, appliances, spas etc. Most of these companies will expect the manufactures participation and a minimum of two years in business.
The way floor plan works is the manufacture ships you goods for re-sale and the floor plan finance company pays the vender. The vender pays the first few months' interest and you pay up to six months interest after that. Interest rates will very from1% to 2% per month. Every deal is different so use this as a rough idea of how the financing works.
I have only provided one floor plan vender's web link because I am familiar with them having used them for floor plan financing when I was in the spa sales business years ago. They do offer other types of financing as evidenced on their web site. http://www.tfc.textron.com/index2.html
Owner/Seller Financing
Always ask for owner financing. If you are buying a business, be aware that at least 90% of all businesses sold are partly owner financed. Real estate is often owner financed, if for no other reason then to spread out the seller's income tax liability. Real estate can be owner financed, and the seller can then borrow money using the note as collateral to get money now, and make their payments out of your payments to them. If you are buying business equipment, ask the seller to arrange the financing.
Venture Capital
Venture funds look for large deals where the underlying business will make a fundamental industry change. The goal of a venture capital fund is to cash out in five years with annualized returns of 20% plus. They will expect you to go public, or sell out to a public company. If you have an industry shattering idea or product, and the experience management team to pull it off, and a specific competence, such as software, or patents, to back it up, by all means go for the gold ring.
Selling Stock
The statutory requirements to sell stocks are more then most small businesses want to deal with, or more then they can afford to comply with. The requirements are quite extensive, and a visit to the bookstore will reveal lots of good books on the subject. To sell stocks on a national basis requires a minimum of four million dollars in assets, and lots of paperwork, an investment banker is a necessity. Cost to go public will more then likely exceed a half million dollars, and take at least a year. To sell stocks on a statewide basis requires a registration with the state and lots of paperwork.
Under regulation "D" of the security and exchange commission you can sell up to 1,000,000 in stock with out a filing with the security and exchange commission. The filing is at the state level. This is still a highly regulated undertaking, and must be handled with professional assistance. Check with your secretary of state. Cost to go public statewide can run $100,000 plus. In both cases you will need an attorney, a CPA, and some one to sell the stock. See link below for help.
More information is available at the sec's web site, at the small business link.
A Google search found lots of resources on the subject. The Sec's web site links is shown below. A search for secretary of state by state name produced the web site for my state's secretary of state, and information on assumed names, corporation's, and partnerships, and information about business corporation filings, and regulations.
http://www.sec.gov/http://www.regdresources.com/profile_main.cfm
Note: A private company selling Reg-D help. We are not affiliated with this company.
Recommended Reading
Guerrilla Financing : Alternative Techniques to Finance Any Small Business.
Published by Houghton Mifflin, 1992 ISBN 0-395-52264-1 US $11.95