A Beginner’s Guide To Using Other People’s Money When Launching A Business – Forbes
The enormity of the finances required when starting a business can make you feel like an ant staring up Mt. Everest. The U.S. Small Business Administration estimates that “most micro businesses require $3,000 to get started,” which is a significant amount of cash for just getting off the ground. That number can be taken contextually amongst the backdrop of the average amount of money that the average American household has saved: $8,863, according to a 2018 article by Bankrate. That means that the average American household would have to dole out over ⅓ of their savings to hinge on a startup.
Of course, the financial situations of first-time entrepreneurs can differ widely, but one thing is for sure: no one wants to use their own money if they don’t have to. We can borrow a page from the playbook of Robert Kiyasaki the author of The Art of the Start and Rich Dad, Poor Dad, in which he states that the best way to make money is by leveraging other people’s money, or ‘OPM.’ Alyssa Gregory wrote for The Balance Small Business that “Using other people’s money also buys you time and allows you to do things in your business, you may not have been able to do if you financed it yourself. You have more options, increased reach, and the ability to make a bigger impact much quicker as you start your business.”
Still, with all its benefits, it can feel intimidating. How to start? Whose money to use? Colin Yurcisin is the founder of Credit Class, and helps hundreds of students around the world leverage credit to start their businesses, build income streams, and travel while doing so. We sat down to create this beginner’s guide which will help you to understand your options so you can invest in yourself and get started on your business.
1. Consider Using Credit
Believe it or not, lines of credit from credit cards are considered other people’s money. Sure, it’s the bank’s money, but it’s a form of borrowing nonetheless. Yurcisin filled me in on why he always advises new business owners to rely on business credit cards. “When applying for a business credit card, the credit limit will typically be three times the amount of your highest personal limit,” Yurcisin explained. “This means that if your highest personal credit card has a $10,000 limit, you can qualify for up to $30,000 in business credit.”
Obviously this will need to be paid back — but with most business credit cards, there’s a bit of a delay before the first payment is required. “Many business credit cards have a 0% interest rate for the 9-12 months, which gives you time to start to turn a profit in your business and pay off the loan before a cent of interest is ever accrued,” Yurcisin added. Plus, perks galore: some business credit cards allow you to use the points from your business investments to pay for flights, hotels, and rental cars, and can even unlock cool benefits like lounges at airports or even co-working spaces (like American Express’ partnership with WeWork last year). Yurcisin helps his students travel in luxury for free or little to nothing by taking advantage of this credit.
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2. Grants, Loans, And Awards
Especially in the current economic climate, it’s more important than ever to be privy to updates that can help your business. As Farnoosh Torabi shared with SoFi, “Information is so vital to your success right now… there’s no such thing as too many resources when it comes to financial health.” Right now, these resources can include government stimulus packages, federal loans with amenable loan forgiveness plans, subsidies, grants, and more.
A note about the loans, however: your credit score matters greatly. “Your credit score is a reflection of your brand,” explained Yurcisin. “It can be the golden ticket or the downfall of your ability to access credit or loans for your business. So, your first priority should always be raising your credit score so you can unlock more capital, perks and freedom.”
In the meantime, there are countless other resources available for new startups. One such resource is the Tory Burch Foundation, which offers grants and updates on other grant opportunities. Some applications are seasonal, so stay tuned for when applications open and when the money is awarded. The best part about these grants is that they don’t need to be paid back, which can be a welcome reprieve as opposed to utilizing loans or credit lines.
Finally, we have investors – angel or otherwise. You may have heard of the three F’s – “friends, family, and fools.” Asking for an investment can feel strange in today’s economic climate, or it can feel challenging to even find angel investors. But resources still abound. One example is ACE-Net, which is a network developed by the Small Business Administration to connect angel investors with entrepreneurs. Ladies Who Launch also has a full list of investor-finding resources, including venture capital firms that are solely devoted to female founders! Remember that these investors are looking for opportunities too, and if they like your business model and can get behind your mission, it’s a win-win.
Angel investors can begin with smaller ‘seed’ amounts, which is advised when you’re in the early stages. As great as it can be to receive a mass influx of cash from a venture capital firm, you’ll have to pay for it in equity. And still, Yurcisin will remind us of the importance of a credit score — while investors are likely to invest in your business because of its value proposition, they also want to know that you are capable of paying them back, so they may ask for bank statements or run your credit score. This is why keeping everything ‘in-house’ and relying more on your own business credit lines or grants or award money can be advantageous. It’s up to you, but one thing is for sure: there’s no shortage of options to help you utilize OPM in launching your business.