Where Not to Look for Money — And Where You’re More Likely to Find It

Entrepreneurs can save time and angst by looking beyond banks and other mythical sources of startup capital.

One of the major obstacles entrepreneurs face in starting a business is raising the money they need. It can be the most time-consuming, frustrating and disheartening factor in launching a new venture. Save yourself some energy and angst by not looking to sources that conventional wisdom would suggest as logical places to find startup capital. Instead, focus on more realistic prospects.

Here is a list of places you shouldn’t be looking for money, followed by where you’re more likely to find it.

Banks
At first blush, bypassing banks may sound crazy — that’s where the cash is. Banks also offer one of the least-costly sources of funding. But banks generally are not interested in lending to start-ups. They seek out established borrowers with a credit history that can help them determine their risk and the probability of being paid back.

No matter their lending criteria, which can vary, banks won’t lend to a start-up in most cases unless the principals sign a personal guarantee and have assets to back up the loan in case of default. Bankers focus on the negative side of new ventures: How can I recoup my money if the business fails? Their depositors do not expect them to risk their money. For this safe approach, depositors are satisfied to receive a lower return on their money.

Venture Capital Firms
VC investors can receive tremendous publicity about their big hits with famous high-profit companies. But they expect that most of their investments will fail. Perhaps two out of 1,000 plans a VC looks at will be chosen for investment. VC investors focus on how fast the company can grow and how big it can get.

Before investing in a company, venture capitalists generally want to see:

Proven successful owners

  • A team of experienced people
  • A business plan whose idea is likely to win out against strong competition
  • The potential for high growth and profit within five years

What’s more, VCs typically insist on a large equity position and the ability to take over your company if you can’t make your projections.

Credit Cards
The media can tend to glorify the rare individual who starts a company on credit cards. It is a route I would not recommend. Credit cards are debt, not an investment. If you are a start-up or small business not yet earning a profit, it’s important to think through how you would pay off the credit-card debt. The odds are good that you won’t, and you will end up with a poor personal credit rating and a frayed relationship with family members you are supporting.

But if you earn a profit and need only a seasonal infusion of capital, then credit-card debt might be a feasible option. One caution: Their interest rates are typically very high.
Keep tomorrow in mind. Starting a business that fails is not fatal to your future. It can be a learning experience that future potential investors usually don’t hold against you. But a spotty personal credit rating can damage your prospects.

Family
Those closest to you can be a good source of money for start-ups. They know you, are on your side, and aren’t as likely to scrutinize your plan like outsiders would. But think twice before accepting family money if you feel the family member cannot afford to lose it and also does not fully understand the risks.

If you don’t look for startup funding from banks, venture capitalists, credit cards and family, you’ll save a lot of time and aggravation. Of course, with some success behind you, these sources may one day be perfect sources of financing.

Where to Look for Startup Funding
Here are some places where you may be more likely to secure the money you need for a new venture.

  • Creative savings. Carefully analyze all your money needs and think creatively about how you can get things for nothing or at a lower cost. This review may not be as difficult as it sounds. For instance, consider bartering and ways to lower your overhead expenses. Look for ways to outsource tasks since this can convert a fixed expense into a variable one and you’ll pay for it only when you make a sale. Accomplishing things without using cash is the same as getting money — with the advantage of not paying interest or giving up equity.
  • Angel investors. These backers tend to invest smaller sums and take less equity than venture capitalists and usually make a more meaningful noncash contribution to your survival and growth, such as advice and introductions to others who can help you.
  • Partner suppliers and customers. No equity is involved in these deals, but your objectives are achieved without paying cash. For example, if you have a product that you sell through retailers or work with regular suppliers, make them an exclusive offer, such as a specific time period for free advertising or an agreement to purchase on extended payment terms.
  • Reinvested profits. Scale back on your plans for quick growth and focus your efforts on organic growth where your profits are reinvested in the business as a substitute for raising capital. It is a slower approach, but it can be more profitable and less of a strain on you and your company’s well-being.

This is from my column for Entrepreneur.

7 Ways to Get Good Word of Mouth

The most effective advertising a company can get is more difficult to achieve but much more effective and lasting than traditional media advertising. It is word of mouth advertising, and it is earned rather than purchased. It is your customers’ opinion of your product, which at times can be very vocal with praise or derision.

It is available to start-ups as well as large corporations. It can be achieved with minimal cash outlays by doing things right. It can be earned quickly or over a long period of time, depending on the product or service you are selling. Word of mouth is sometimes instantaneous. After people view a new movie, they talk about what they’ve just seen. It could be “What a great picture” or “This was a stiff.” Descriptive word spreads quickly, and new viewers of that movie result if those who saw and liked it tell their friends. On the other hand, word of mouth on an automobile takes a much longer time. Drivers are interested in how well the car drives, the ease and quality of service, the car’s trade-in value, how problems are handled, car breakdowns, etc.

Here are seven factors to consider for creating a good word of mouth for your company and its products.

1.    Quality – From day one, all company employees must be aware of the importance of maintaining quality, and systems must be put in place to monitor it. Any products or components outsourced must be rigorously inspected to see that your standards are met.

2.    Service – Regardless of whether your product is a high or low service one, customers’ problems with its use must be addressed and solved with a minimum of effort on the customer’s part and in a timely fashion.

3.    Instructions – Many products need to be assembled or explained. The instructions accompanying the product must be clear and concise. Many companies fail miserably in this area and devote little time and effort to it. Poor instructions can turn off consumers to all your future products and create bad word of mouth.

4.    Communications – All contact with your customers and their inquiries must be promptly addressed with courtesy and knowledge. This starts with the telephone.

Tip for Entrepreneurs: Have humans answer your phones, not computers like most large companies do. This simple move will start you on the good word of mouth path with your customers. Also your receptionist, who I call “The Director of First Impressions,” is a more important hire than most employers acknowledge. You want an upbeat, intelligent, pleasant person in that slot. Management’s interactions with employees, suppliers, and stake holders should also be first class and monitored. This good word of mouth as well as customers are important to the company’s health.

5.    Value – The value you deliver on your products to customers is paramount in their returning and spreading the good word about you. It must meet or exceed their expectations. A good maxim to deliver to all the employees is to under promise and over deliver.

6.    High integrity – You want all your stakeholders and customers to trust you. This trust must be earned continuously. It takes time to develop, but can be lost in an instant. Problems must be addressed and solved quickly. They cannot be ducked, delayed, or shifted politically. Mistakes should be admitted and corrected. People want to do business and work for trustworthy companies.

7.    Be a good citizen – There is no doubt that a company’s prime responsibility is to make a profit. To not do so will eventually lead to its demise and the loss of all jobs. Do not be embarrassed to earn a profit. However, I believe the company has a responsibility to take actions to enhance the quality of life of their community and employees. This good citizen appellation should not be just empty promises for show. If real, it is also good for your business, your family, and your sleep.

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