Here is a situation that has been commonplace in the era of the 2008 financial crisis. Brilliant ideas are being wasted. Banks aren’t lending money. Tightened federal banking regulations have made banks stop doling out dollars to all but the best credit ratings.
We get that part, but interest rates are at historic lows. The cost of money has not been so cheap in modern history. When money is cheep, economic theory says there must be lots of it floating about; not so.
Young brilliant minds with creative ideas are springing up in cities across the country. This is the golden age of entrepreneurship. Like hungry predators that have watched the Bezos and
Ground Zero Isn’t Quite As Pretty
No matter if you are a startup or run an existing business, everybody needs money. It feels so easy to spend and so damn hard to raise business capital. Here are the biggest mistakes people tend to make when financing their business.
Student debt is at record levels in America. It is a debt trap that is unavoidable for many. It is necessary but it screws up your FICO score for years. It makes better financial sense to sell a kidney, but we don’t recommend it to anyone.
The next killer is credit card debt. The history of business startups is riddled with stories of entrepreneurs that maxed out all their credit cards. Aside from the absurd interest costs, there is the low probability of entrepreneurial success. Ask yourself the question, if there was a 95% chance your business failed within less than two years, would you commit yourself to paying as much as 28% annual interest for debt that never seems to go away?
So here you are, no assets, maxed out credit cards, a FICO score that looks more like a basketball score than anything else and nary a bank that will talk to you. What do you do with your sure fire idea?
Keep Your Eye On The Most Important Asset. Your knowledge and creative thinking skills are your most vital resource. So in your search for money, you want to take actions that will simultaneously improve your FICO score. Sounds impossible, but accomplishing both can be done. Just follow a few common sense rules.
1. Focus on paying down debt
The first place that other successful business entrepreneurs go for capital is commonly known as “Friends and Family”. If you are lucky and have a rich uncle, this is terrific. There is nothing wrong with a rich aunt but be careful, this is a business transaction and unpaid loans to family members can make for very uncomfortable Thanksgiving Dinners.
At this stage, give away equity rather than making a loan agreement. You have no means of paying interest anyway so why bother to start out dooming yourself to problems.
2. Let the Crowd Fund Your Idea
In the last few years crowdfunding has become a ligament access to capital from as little as a few thousand dollars to $20 million and more. In the beginning, your social network needs to be broad and strong and your business idea has to be pretty compelling. The good news is that all kinds of ideas and causes are getting funded on line at sites like GoFundMe.com, Kickstarter.com and Crowdfunder.com.
Each site caters to a specific type of investor audience so do your research and select your partner accordingly. Some of these sites are pure donation sites, so if you have a cause but a low FICO, no problem.
All you need to get going is a short well thought out business plan along with a well-targeted investor pitch deck. If you are a wiz with spreadsheets, put together financial detail that shows your sophistication. At all times avoid excessive use of adjectives like “awesome” and keep you financial projections grounded to earth. It will make a difference.
You may have to pony up a few bucks to the website hosting your campaign but it won’t be so much to be a deal breaker.
Raising capital for business is a full time pursuit and can be exhausting. Raising equity capital has lots of advantages for young or even small businesses. However, it also means you are giving away ownership of your idea. But, if you are wildly successful, giving up a relatively small amount of equity is worth it.
At the same time, you are taking on a business partner and many don’t wind up being silent partners. You can expect to deal with lots of suggestions and second-guessing. So what if you have a limited competitive edge, a production contract that requires immediate cash and still your FICO score is in the toilet.
3. Finding Fast Cash
Increasingly the solution to the void in institutional business lending is being filled be private sources. We are talking about hedge funds that have access to huge amounts of customer data that can be accessed in a heartbeat and spit out an answer in a short period of time.
In the last several years, names like the LendingClub.com and Prosper.com have been on the vanguard of business-to-business lending serving people with less than perfect credit and no assets. These companies know almost to the decimal point, the percentage of borrowers that will fail to repay and have set interest rates accordingly.
The important thing to keep in mind is that these rates may be higher than things like your home mortgage but they typically are about half the rate on bank credit cards. We are talking around 12%-15% compared with the 28%-36% credit card lenders get for low FICO score borrowers.
Customized software does all the loan processing and most of the time loan approvals come through within 24 hours with little paperwork.
The great news here is the market is getting more and more competitive every month. LendingClub.com and Prosper.com may be among the largest but a Google search will yield a laundry list.
I made the mistake of letting my email and phone number out to one business lender and now nary a day passes that two of three phone calls and even more emails come through offering money.
So don’t let a 500 FICO keep you from moving ahead with your big idea. While you are busy getting business capital, here is a suggestion, borrow as much as you need to pay off high cost personal credit cards. If you pay down 92%-95% of your personal credit card debt it will due wonders for your FICO score.
