A LITTLE KNOWN SOURCE OF BUSINESS START UP LOANS

If you have read my book or heard me speak you will know I am very much against anyone starting a business on borrowed money. I have heard people say that they are going to get their business start up money from their family (mother, father, uncle or father-in-law) and I think that is a big mistake. You might find out that Thanksgiving turkey doesn’t taste quite as good as it used to. It might not be nearly as much fun being around relatives when they start asking when are they going to get their money back after your business did not go as planned. Never borrow from family or friends. It is a plan with disaster written all over it. On the other side of that never loan to family or friends. Never co-sign a note for anyone or ask anyone to co-sign for you. You are putting both parties at risk.

I have started many businesses but none with borrowed money. I have started a couple of businesses from broke or no real capital, back in my younger days. That sometimes works out with a job or two on the side to keep you paying the bills. We all know that happens often with young actors trying to get their career going. The same thing can happen starting a small business. You can succeed if you try hard enough.

I started a propane marketing company many years ago with no money. Here is what I did…I knew where I could buy distressed propane at a low price; propane that an oil company was just going to burn off because they had no place to store it in the summer. I would buy it from one refinery in the summer, ship it to underground salt caverns in Louisiana and sell it to another oil company for delivery in the winter at a profit. Because I had no cash but had signed contracts with both oil companies the bank loaned me money because they could see the profit on paper. And there was no doubt the oil companies could pay. Something like that may or may not work today. It might work today if you had a firm contract to sell something to someone like Wal-Mart.

When I started my western wear business I only set aside $50,000 cash to get started and in the clothing business that is a drop in the bucket. What I had to do was what even some of the big guys in the business do and that was to use a factor. A factor is a company that advances you about 70% of your invoice (or accounts receivable) freeing up your cash. Here is the way it works. Let’s say you make cowboy shirts that cost you $10,000 to make. You sell them to a western wear store for $15,000. On paper you have made $5,000 but you have to wait 30 to 60 days for your money. The factor advances (Or loans) you $10,500 against the order the store has given you and you have the money to make more shirts.

There are two problems with this common way of financing the clothing business. First The factor charges loan shark rates 5% of the total invoice for 30 days which equals $750 of your $5,000 profit. That doesn’t sound so bad but that equals about 15% of your net profit. The second bad thing about using a factor is if your customer goes one day past the due date you owe the factor another 5% or another 15% of your net profit. To make things worse, if your customer falls sixty days behind you immediately owe the factor the full amount advanced to you or in this case the entire $10,500. It is up to you to collect the $15,000 balance owed by the customer. Also keep in mind the $1,500 you have already paid the factor for the use of his money. This is a common practice in the clothing industry but I think it is a very risky way of doing business. I made a lot of money in the western wear business but did not like the risk. I figured I was too under capitalized and finally just walked away with my profits.

There are two other traditional ways to get capital: one is Grant Money and the other is a SBA Loan (small business loan). Each way is long and complicated and it would take many more pages and a great deal of detail to explain. I have personally checked into both in the past but declined to pursue them any further because of the many strings attached. My over all opinion of each is that you could get in trouble accidentally with the government and no one needs that extra legal exposure. But if you want more information on either of these two subjects a will be happy to assist you.

Today with money so tight and the economy so soft, banks are not lending money to start up business. If your credit score is not in the high 700’s or 800’s and you have a good outside income you are not likely to get a loan. Today banks are only loaning money to people who don’t need it. I have excellent credit but would not personally borrow any money in these uncertain times. A good deal is not a good deal if you have to worry about paying back a loan.

However, there is a little known way to get capital out there today and that is called peer-to-peer lending. In short it is person-to-person lending. It is a way for individual lenders to make more interest on their money than they could from a savings account in a bank. It is a way for individual borrowers (possibly with less credit than needed at a bank) to borrow money. The internet is full of information and sources of peer-to-peer loans. Needs vary and rules vary so be very careful. In 2007 records indicate these types of loans totaled $647 million. It is estimated by 2010 that total will be $5.8 billion.

Although this may appear to be the answer to get capital for your new business be very careful. If you are the borrower or the lender the risks are high. At the present time this industry is very loosely regulated and either one of the parties could be in the drug business or some other kind of illegal business. Don’t put yourself in the position of building a good business only to lose it to a bunch of bad guys. Be very careful because it is not always easy to know who you are dealing with. Personally I think this is a bad idea but I felt obligated to keep you well informed.

It is still my opinion that you should never start a business with borrowed money. If the business you want to start requires a lot of capital that you don’t have, first start another kind of business. Take the profits from the first business to start the second business.

For example…If you want to start a manufacturing company but do not have the capital. Start a lawn maintenance business, save all the profits until you have the capital for the manufacturing company without borrowing any money.

Remember the borrower is the slave to the lender. Don’t put yourself in that position. Take your dream and turn it into your reality (without borrowed money.)

If you have any questions feel free to contact me anytime.

Carl Wheeler