The FIRST RULE OF THUMB
The rule of thumb before borrowing money from anywhere is: “If this were someone else’s business (NOT mine) would I invest in it and what ROI (Return on Investment) would I expect, over what period of time?”
Banks and Financial Institutions have a built-in ROI to protect themselves, but if you are self-financing you need to have an expectation and a time frame for yourself to know that borrowing money was a good idea and a sound investment.
SOURCES OF FUNDING:
1.) Getting finance from a bank or other financial institution:
If they are going to invest in you and your business they want to feel confident that you know what you’re doing, that your business idea is sound and that you will be able to pay the money back
They like to see a business plan including a financial plan with realistic financial projections. Banks are usually conservative and risk-averse so you need to have a good track record and have plenty of supporting evidence to back up your idea.
2.) Financing it yourself from a line of credit or re-structuring your mortgage.
This can often seem like the easiest way of doing things BUT there is a much lower level of accountability. And that’s where a lot of people fall down – they don’t prepare the detailed business plan, they don’t do a financial plan and they don’t project how they will get a return on their investment on lending money to themselves. Do the same prep work as if you were applying to a bank!
A line of credit that you have instant and easy access to is probably the most dangerous way to borrow of all, unless you are SUPREMELY DISCIPLINED! You need to set firm rules around what the money can be used for and set up a repayment system that you will be accountable to.
And I don’t recommend borrowing from family and friends! It almost never works out or gets paid back..
3.) Angel Investors and Venture Capitalists will lend money to start up business. The risk is higher for them than for banks. This is why they are investing their own money, so the deal is usually constructed on an individual basis.
Venture Capitalists are professional investors, individuals or groups, who may want a bigger slice of the ROI, or they may want a slice of your business or a shortened deadline for money to be paid back. Angel Investors can be individuals or groups of people who look for investments that go beyond monetary return. This is the preferred option to bowing from friends and family.
Raising venture capital is a very deep and fascinating topic, so I’d recommend further research.
I highly recommend Keith Cunningham’s book “Keys to the Vault“. Keith is the “rich dad” that Robert Kyosaki refers to in “Rich Dad, Poor Dad” – also well worth reading.
Please be aware that I am not a qualified financial adviser; I am a Business Coach with 10 years’ experience coaching hundreds of businesses. These are my opinions based on personal and client experience and my own research and education. Please seek professional advice from your Accountant or Financial Adviser.