Video: Module 2 – Other Sources of Finance
Presenter: Andrew Earnshaw
One of the most challenging things when a person is starting a business is finding the money, the financing to get them started. Generally speaking, we see a lot of people who start small businesses go to the bank, they might find someone like a community future's office in their community. If they can't get money from there, they tend to give up. Which is too bad, because there is a lot more sources of financing out there.
In your course materials, you'll see a list there, and I'd like to go down that list and just talk about what we mean by a few of these sources of financing.
My favourite, love money. Love money is one you probably thought of yourself. I just want to discuss it briefly, because we're going to talk a little bit later about what investors look at when they decide whether they want to give you money to start a business. Well, all investors think about those things except this one category. This is the category of people that say, "I love you, therefore I'll give you some money to start your business." Which is great. Lots and lots of businesses get started with money from friends, family, etc., etc. There's a catch with love money, though. You want to make sure you can go home for Christmas. If Mom and Dad don't make it, if they pass away before you finish paying off your business loan, you want to make sure you still have an ongoing relationship with your brothers and sisters. Love money is tricky in terms of relationship. If you get money from friends or from family, it's really important that you have something in writing that clearly defines the terms. It's not, you thought it was a gift and they thought it was a loan. I've seen that a couple of times in businesses that I've worked with. Just make sure that the lines of communication are clear and that you understand how much is being loaned, is there interest, is there not interest, when did we agree to pay it back, etc. etc.
The source of financing is so rarely considered for small businesses, and I find increasingly that that's it's a great loss, is angel investors.
An angel is somebody that has excess cash that is interested in making investment in small business. This is a person that's saying, "I like small business. I think it will be great to help out this person get going. I might even like to be a venturer for them, give them advice based on the years of experience I have in business, and I'm willing to make an investment that's an equity investment that pays off for me if this business succeeds, so I become in some sense a partner you often hear the term "a silent partner" in this business venture.
It's a real challenge for folks to think about where they would find an angel investor. Most people kind of think do I have do I know any friends that have that kind of money? Oh, I don't? Oh, okay, well, I'm out of luck.
But if you think a little deeper about the business you're in, there's usually angels in the circle of the industry that you're participating in that are interested in the kind of things that you're doing. Let's say you developed some clever attachment for a backhoe. Well, is there someone in your town that has a really successful equipment retail dealership, and you know they've been in business for many many years and they're probably quite successful. They might think it's kind of a neat thing to get involved and put a few thousand dollars or a few tens of thousands of dollars on the line to help someone like you get started. Or maybe you've got a company that's going to have that's going to provide a service to you that you're going to be a customer for, like, say, a powder coating outfit.
There is an example of someone that, again, an established business person, extra money in the bank. Even if you have mediocre success in terms of profits, if you at least survive, you're going to bring more business to that person's business. Another good source of angel investing. Often retired professionals: accountants, dentists, doctor, other kinds of folks that make these sorts of investments. Maybe someone that's done exactly the same business as you have. Classic restaurant start ups I should say successful restaurant start ups are done with angels that have run three or four successful restaurants before. They provide the money, the owner, the entrepreneur, is someone that's worked in the kitchen as a chef or has managed the front end of a restaurant for many many years. The two of them together can make a successful restaurant.
Angels are a really, really valuable source of financing, and I encourage you to think long and hard about where you might find them.
A lot of people, if they need to lease a location, to say a retail location or maybe a manufacturing facility or something like that, they're in such a rush to find the right place to start their businesses, as soon as they find it, they run to the landlord and they sign the lease. They're missing an important source of financing right there. Usually when you go into a place that you're leasing, you're going to, in the first couple of weeks that you're there, make tremendous improvements to the value of that property. That if things don't work out and you move away, or you have to go somewhere else because you've expand from growth or something like that, you're leaving all that value with the landlord. You're got a tremendous opportunity right before you sign the lease to say, "Hey, I'm going to spend $10,000 in this building. I'm going to paint it, I'm going to put in washrooms, maybe I'm spending more money on putting in a commercial kitchen or something like that, and that's all going to be there if I ever leave. I'd like you to reduce the rent to compensate me somewhat for the improvements I make to your property." Most landlords will do that, and certainly you've got nothing ventured, nothing gained.
Transcript provided by: Accurate Realtime Reporting Inc.