OTHER PEOPLES’ MONEY 101

….The costs of overhead, labor, materials and such make starting a serious enterprise an impossible proposition without utilizing other people's money.

Because the economy is weak and jobs are being lost, many unemployed persons will now be forced to look at the possibility of becoming entrepreneurs.

Borrowing from friends and relatives is a good way to alienate them. As a lawyer with many years experience, I have seen such loans and investments wreak havoc on clients' relationships over and over again.

Bankers are usually ready to lend you money for a venture only in some circumstances, such as when your business already has a track record of making money, or when you pledge collateral that you are willing to surrender if things go very wrong, or when somebody is willing to co-sign as a guarantor of the loan. Otherwise, the only way to get them to lend money is to show them that you are a wonderful credit risk and don't really need the loan.

There is a world of venture capital firms out there, but they tend to fund from circles familiar to them, persons introduced by social networks they already know and are predisposed to dealing with, which puts the odds against most searches for capital in this route.

The major venture capital firms may be tough to crack, but there are small investment groups and wealthy individuals who are more approachable.

But no matter who you are talking to about obtaining working capital for your business, the odds of success greatly increase with a detailed business plan which explains the following:

1. A detailed description of the company's proposed and/or present operations. This includes: An explanation of precisely how the company makes money, or will make money.

2. An explanation of how the company will spend the money it raises.

For example, who will be the key personnel and what are their qualifications?

3. Who will be the accountant and lawyers and how were they selected? What are their qualifications ?

4. Where will the company be located and what will its rent be?

5. What will its costs of goods or services be? Where will its sources of supply be? How were they selected and what do they cost?

6. How will the company market its goods or services? Where will it advertise? What will its costs of advertising be? How has it selected its media?

7. Will the company have sales personnel? How will they be selected and recruited and how will they sell…and to whom ?

8. What kind of equipment will it need? Where will it buy it and at what cost? How are these decisions justifiable?

These are just a fraction of the questions which must be answered in a serious business plan.

Statistics show that companies that have business plans are more likely to succeed than those that don't. Moreover, without a business plan, getting working capital from an outside source is much more difficult. A good business plan may even impress a reluctant banker.

Once the plan is reduce to writing, it can be then showed to others, but you have to decide whether you want to have shareholders to whom you will surrender part ownership (equity ) of the company or lenders whom you will have to pay back (debt financing ) .

If you do equity financing you have to decide the value of your company's stock and

how many shares you are willing to surrender. Chances are you don't want to lose control by giving more than 49%, or too many seats on the Board of Directors.

Offering stock to suppliers, landlords, equipment vendors and key personnel is one way of financing. Suppliers and customers are sometimes willing to help finance businesses they trust and depend upon.

Then you have to decide how your shareholders will be able to turn their investments into cash at the appropriate time. This is a decision that requires input from accountants and lawyers.

In any event, you need a team, a plan and, most likely, other peoples' money.

By thinking things through carefully and putting them in writing, your chances of success will be much greater.

David Grossack is a lawyer, writerand financial consultant. His newconsulting company, Allerton Hill Advisors, has a website at http://www.goingpublicusa.com E-mail him at dcg3@ix.netcom.com

You must be logged in to post a comment Login

Leave a Reply