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Hunt for start-up capital begins with savings.... |
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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. |
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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. |
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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. |
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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. |
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When set up properly, a failed business should cost you only
a per cent of your original investment in after tax dollars. |
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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. |
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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. |
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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. |
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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. |
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New ideas usually require prototypes and samples. Some
suppliers are willing to produce them at cost in exchange for being the
exclusive supplier. |
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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. |
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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. |
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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. |
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They will want to know if you have prior experience in
running a business and whether you have adequate collateral from other
sources. |
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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. |
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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. |
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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. |
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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. |
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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. |
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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. |
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Published April 13, 1998 |
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