Finance
Financing A New Small Business
In this second article on finance we're going to shift our focus to money, banking and investments. Again, I thank my associate for enlightening me on this subject. You can really lose your shirt if you don't know what you're doing.
Everyone dreams of getting rich someday. Unfortunately, getting rich isn't as easy as waving a magic wand. Unless you're extremely lucky at picking winning lottery numbers, getting rich takes time, lots of it. Of course the more shrewd you are at investing, the quicker the riches may come but even then it's no guarantee.
For every financial risk there is a financial reward that goes with it. The higher the risk, the higher the reward.
Let's start with some low risk financing. You want to start a business. You have very little collateral. So you go to a bank and apply for a small business loan. If you at least have good credit you've got a pretty decent shot at getting one. The loan rate will vary according to the prime interest rate. Small business finance packages can run from $75,000 to $5 million. At the time of this article the prime rate is 4.81%. The business loan will probably have a rate about 2 or 3 points higher at around 7 or 8%. There was a time that 8% was an excellent rate, back in the 70's when interest rates were double digits. But now interest rates are starting to climb again so 8% is just okay.
Of course you can try some high risk financing alternatives. This will bring you a higher return sooner to finance your business but you can also lose your shirt doing it.
What many people do is what we call leveraging. This is the practice of taking borrowed funds and investing them in a high risk stock hoping that this will yield a higher return so that they can finance their business with the profit and pay off the original loan at the same time. This way the money put into the business is all theirs and they don't have to worry about defaulting on the loan.
The problem with this practice is if the stock or stocks tank, then you've lost more money than you would have, can't pay back the original loan and can't invest in your business so that you can make the money to pay it back.
Most people who practice leveraging invest in a number of different stocks, bonds and mutual funds in order to minimize the risk to some degree. Still, this is a very risky practice and if not done correctly you can lose your shirt.
Another thing some people do is get private investors to sink money into shares in their company to be. These are people themselves who are usually willing to take a risk on a new venture if they think they can get a good return. By doing this, you essentially are taking no risk at all. If the company tanks it's the investors who are out their money. Of course some of them may not be too happy about this so getting an unlisted number and address may not be a bad idea.
There are many ways to get capital for a new business. Some easy, some not so easy. Make sure you choose the option that's right for you and won't land you in a situation where you have to be put in witness protection.
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Michael Russell
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