When I unexpectedly lost my job at CBS News five years ago, I decided to start my own business. With a few dollars saved and a 401(k), I hunkered down, hung out my shingle, and Deborah Mitchell Media Associates, LLC, was born.
With a new business comes new financial responsibilities added on to the old responsibilities of a mortgage, monthly bills and food. As a television producer I have done hundreds of stories on reinvention and being an entrepreneur, but there is nothing quite like going through it in real life. The biggest surprise in starting a business is how fast I burned through money.
“Starting a business from scratch can be a daunting task, especially if one has limited funds,” says trading coach Geoffry Wong, who has 20-plus years of experience working with Goldman Sachs and now works with a select group of private clients. "In today’s world, one must understand that branding yourself is very important. Make sure you are an expert in your field.“
Since my parents were not in a position to fund my entrepreneurial dreams, I asked Wong to outline a few ways anyone can launch and run a business when family funding is not an option:
1. Determine how much money you need.
How much money do you really need? Wong says a new business owner has to come up with a valuation of the company’s worth – and that’s very difficult in the corporate world.
Start by asking yourself how much you can actually produce. You don’t know because you have never done this on your own. You can bill a certain amount of hours, but you have no client base, and you’ll have to go out and get it.
Coming up with a concrete business idea, being able to show that there is profitability after everything else is paid, and keeping the overhead low are things you must carefully consider.
2. Keep business overhead low.
Everything – rent, computers, office supplies, utilities, etc. – will be an expense even before you start making profits. This is more commonly known as burn factor. You might have to work from your home or apartment instead of having a fancy address. This will save you money.
Every business owner we talked with all echoed the same theme: Keep your overhead at the lowest level possible. For example, if you must rent a building, look in an area that is a little more marginal than the heart of the city.
3. Approach friends and extended family.
If your parents or siblings do not have the financial ability to help, look to grandparents, aunts and uncles, cousins and friends. Go to them with a great business plan in terms of future expectations of cash flow, revenues with profit potential, and figure this whole thing out after all your expenses are paid.
A creative way to entice your friends and extended family to help is to have them invest $1 per share. Let’s say you need $10,000. A friend could invest and buy 1,000 shares for $1,000, and he would own 10 percent of the company. Limit the amount of shares so that you maintain majority of ownership.
Should your company produce a profit, you could offer a second round and sell shares for $2 each, which would enable the initial investors to buy out at a profit.
4. Borrow from the bank.
This is probably the hardest thing to do because of the regulations of the banking community. They don’t want to lend money anymore because they got hurt in the real estate market. People were buying homes with no money down and the domino effect happened. Those with limited credit couldn’t pay back the money and went into foreclosure, and the banks had to eat those notes.
Now, bank requirements are so strict that it's almost impossible to get a mortgage – or to get any sort of money from the bank – unless you have a perfect credit score.
5. Look to crowdfunding.
When friends and family are not an option, you can always resort to crowdfunding. The concept consists of amassing small amounts of money from total strangers who believe in your ideas and are swayed by your brand’s story.
Many online companies offer the platform, most notably Kickstarter, Indiegogo and Crowdfunder. But don’t confuse this with easy money. For your story to reach the masses, you have to actively promote it on social media and get as many people as possible to talk about it and pay for it.
6. Tap into your 401(k).
Check with your accountant, but you can borrow a certain amount of money from your IRA as long as you pay it back the next year. You get penalized if you don’t. That’s not the worst thing in the world if you have at least $100,000. But tapping into your 401(k) is a last resort because that’s money that goes to you tax free.
In all these cases, a written agreement is important.
"You just want something that’s very general: interest rate, duration of time, the repayment schedule if it’s a loan. It’s imperative," Wong says. "When you mix friends, family and money, it can be a dangerous combination, so make sure it’s spelled out in a contract. People should keep in mind that even with friends, if the company goes belly up for some reason, people you owe money to are not going to be happy. You want to put up a fairly decent contract to protect yourself.”