Hunt for start-up capital begins with savings....
   Entrepreneurs need cash to turn their dreams into reality. Start-up ventures can look to a number of sources for capital, starting with personal savings or family resources.
   Cash requirements for a new business range from a few thousand dollars to $500,000 or more. Most entrepreneurs are willing to risk 25 to 50 per cent of their liquid assets to achieve their goals.
   Let's assume you have a net worth of $400,000, including a $200,000 home and two cars valued together at $40,000. You liquid assets - cash, bank accounts, investments - are $160,000. Under most circumstances, you would put about $40,000 to $80,000 of these liquid assets at risk.
    Bur before sinking your own money into a business, consider seeking professional advice from your accountant. You need to ensure that if the venture fails, you are able to write off the investment against your other income for tax purposes.
    When set up properly, a failed business should cost you only a per cent of your original investment in after tax dollars.
   The credit card. This is often a prime source of funds. Most cards allow you to pay just a small amount of the outstanding balance to remain in good standing. As long as you are in the issuer's good graces, you can use the maximum amount of credit allowed by the institution.
   One entrepreneur knew he would have difficulty raising enough money to start his business. He obtained as many credit cards as possible, which enabled him to finance the company until he had a sufficient track record to arrange for alternative financing.
   Customers and suppliers. The best test to determine whether your idea can be converted to profit is to find a customer willing to pay for it. Many businesses start out by selling someone on a concept and asking for an advance against final payment.
    If the person is not willing to do this, try another customer or rethink your idea. If the market does not want to pay for your business, the concept is probably not good enough.
    New ideas usually require prototypes and samples. Some suppliers are willing to produce them at cost in exchange for being the exclusive supplier.
   In one case, an entrepreneur was excited about a new type of hardware product. She spoke to a number of companies and identified one that agreed to prepare the prototypes and samples at cost. The product has proven successful and the supplier was rewarded for the risk it took.
    When looking for money from customers or suppliers, listen very carefully to what they say about your idea. They see many new concepts, and their market intelligence can be a great source of information.
   Financial institutions. All financial institutions have departments that want to lend to small business. Since start-up operations have no track record, the banks typically view this seed-capital type of loan as high risk. But they will still lend you money as long as they are satisfied with your previous track record.
   They will want to know if you have prior experience in running a business and whether you have adequate collateral from other sources.
    Typically, financial institutions will take a collateral mortgage on your home. This provides them with assurance that the loan is secured by a personal asset and it enables them to manage the high-risk outlay.
   Putting a collateral mortgage on your house is a very emotional decision, but if you have customers and you believe in your idea, it may be worth the risk. The downside is that you won't succeed and you will be left with a significant debt to repay from personal assets.
   Private investors. Investors who have surplus funds and want to invest in new ventures are called angels. They come in all sizes and from every area of society. Finding the right one for you requires some searching. The best sources are professional advisers and industry associations.
   Most associations know the individual investors who are active within their industries. One individual decided that the market needed a new health food. He struggled for a while using personal resources and a special deal with a manufacturer.
   His business started to grow. He discussed the matter with his accountant, who was able to put him in touch with an angel who invested $50,000 in the venture. Perseverance is important. Most angels are very cautious and they only invest for a significant portion of equity and a senior management position.
   New ventures need cash from a variety of places. The winners understand that they must have it at the right time or their business will fail. By using all these sources, you will increase the chance of success.
    Published April 13, 1998
Disclaimer: This website contains the opinions and ideas of its authors and is designed to provide useful advice in regard to the subject matter covered. The author and publisher are not engaged in rendering legal, accounting, or other professional services in this website. This website is not intended to provide a basis for action in particular circumstances without consideration by a competent professional. The authors and publisher expressly disclaim any responsibility for any liability, loss, or risk, personal or otherwise, which is incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this website.