Introduction to Management

Financing Your Home

Money Myths

The mantra is "it takes money to make money." This is mostly hype since it has become cheaper and cheaper to launch a business. For most new businesses, the greatest cost of launching a business is the time of the entrepreneur. Most new businesses can be launched for less than 1,000 pounds in hard costs.
This bears repeating. At present, being an entrepreneur is more about working hard and designing services and products to meet client needs. It is much less about buying assets and slowly making back that investment over time.
What if a new venture is projected to take considerably more money to launch?
When your business is at the nascent idea stage, you need to be careful to understand where your capital is going to come from. If it can all come from your personal savings and you are okay with doing this, you do not necessarily have to be concerned about financing. However, you need to remember that there may be a point where you want your business to expand but do not have the personal or corporate cash hoard to do so.
So you need to ask yourself whether there is financing available. If there is not, you are going to have to adapt to starting out or expanding on a shoestring basis. If there is financing available, you need to begin your preparations to use it as soon as you can even if you do not have any plans on doing so. When you can access financing through selling shares, taking out a loan against an asset you own or even through a higher interest option such as a personal loan or a credit card, you have far more options than if there is no financing available.

Finding Finances

What if a new venture is projected to take considerably more money to launch?
If you cannot launch using just your personal savings, there are several ways to make up the difference between your plan and available funds:
1. Bootstrapping. This means trying to find new ways to spend less money by modifying your plan. This may sound like an obvious suggestion, but many people refuse to shop around for services to find low bids or try to find bargains on required equipment. Buy used and cut expenditures such as fancy offices. 
2. Use resources for the least cash. Many entrepreneurs will try to save money per month by renting with longer leases or through buying assets instead of renting them. This makes very little sense considering that most new ventures fail, and many of the ones that survive dramatically change their business plans. A long-term lease or purchase should be considered after the new venture is proven, not before. Though this will make the venture more expensive initially, it will require less cash dedicated to a longer lease or a purchase.
3. Investments from the "3 F's": friends, family and fools. Many people collect funds for their new ventures from their social networks. This may seem like a good idea, but money can destroy precious relationships in your life. Many of your friends and family members do not understand new ventures and the severe risks they embrace.
If you have a family member or a friend who is an entrepreneur or a venture capitalist or who has worked for multiple startups, then that person may understand what they are getting into. However, nearly everyone you know earns a living through being an employee or is a dependent. These people can be very intelligent or successful and can include doctors, professors, lawyers, accountants, teachers, civil servants, scientists and engineers. Regardless of intelligence, they probably do not understand the harsh reality that most businesses fail. This is a hard lesson, and it is probably best for your relationships to not be the one that teaches them the realities of business risks.
4. Prepayment by customers. Your customers can help fund your business if you have them prepay for products and services. This can be done as a company policy or through crowdfunding websites that allow entrepreneurs to sell products long before delivery.
5. Supplier credit. Many suppliers will allow businesses to pay long after their products have been delivered. This delay in billing is a form of credit and allows a business to operate using less invested money.
6. Crowdfunding. There are many websites which facilitate small equity investments in new ventures. Entrepreneurs can use crowdfunding websites to sell a stake in their companies for money.
7. Angel investors. Angel investors are high net worth individuals who invest directly in new ventures.
8. Venture capitalists (VCs). These are investment professionals who invest other people's money in different ventures. They tend to demand a lot out of their portfolio companies.
In general, money raised from crowdfunding and angel investors is thought to bring less stress for entrepreneurs than money raised from venture capitalists. Raising money from VCs is considered to be more appropriate for later-stage ventures which are looking to increase scale with large investments that are too large for single angel investors to provide.

The Flip Side of Financing

Entrepreneurs who trade money for ownership in their company are not getting money for free. Startup managers have an ethical obligation, if not a legal obligation, to try to grow the value of their shareholder's stake in the venture. If nothing else, entrepreneurs could find that disgruntled owners are annoying and bug them with excessive phone calls and legal threats. Moreover, the original owners of the company will see their ownership in the company get diluted when they sell a fraction of their ownership. 
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