Risk of investing savings
As mentioned in part 1 of this series, another area that business owners fall short regarding financing preparation is the area of personal injection. Entrepreneurs looking for funding are unpleasantly surprised when they are asked "How much have you personally invested in this project?" Personal injection can present itself in many forms, such as bank savings and investments, real estate equity, gifts from family and friends, and monies already invested in the project. Borrowers should be prepared to show how they are willing to invest 10-30% of any amount requested from a lender or other funder.
Too often business owners frown upon making 1 or 2 security payments upfront or walk away from funding altogether because they don't wish to list their homes as collateral. Contrary to popular belief, this just doesn't apply to new business owners. I had an experience with a customer who had been operating his business for over 10 years and now needed funding to purchase updated equipment to keep the business running. Unfortunately for him, his credit was not strong and he wouldn't qualify for traditional funding. He did however own property, his personal home and some existing equipment that would allow him to qualify for the funds he requested. He declined to list his home as collateral and was not able to secure financing. When asked why he chose not to list the home, he stated he didn't want to chance losing his home if he defaulted on the loan.
He was honest in his response, but look at this from an investor's point of view. What investors see is a business owner without a strong belief that he can make this business work; a business owner willing to risk others’ money, but not his own. What investors conclude is that this transaction is too risky and they move on to review the next of many opportunities in front of them. How can a lender be convinced to invest in a business when the business owner doesn’t appear willing to invest in the venture?
Many business owners look to personal loans and credit cards to start their business or to keep operations running when cash flow is tight. Be certain thorough planning for the use of these funds and the cost of repayment on the loans and credit cards has taken place before moving forward with this option. Demand for unsecured personal loans have greatly increased within the last 18 months. Make sure all rates and terms associated with the “quick, easy access loans for people with bad credit” are read and understood before signing the dotted line. One on-line advertisement for such a loan actually contained the following verbiage in small print at the very end of the ad,
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Take the time and effort necessary to invest in yourself and know what you are signing up for when requesting funding through lenders and investors. Come to the investor's table prepared to show that you believe in yourself by putting your money where you are asking other's to put theirs. Be the first in line to believe in and support your business. Then the passion and excitement about your idea just may be contagious enough to get you the support you need.
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