Entrepreneur Insights: What New Businesses Can Expect When Financing

Brooke Chaplan

May 21, 2014

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Many great businessmen have written books explaining that you can start businesses without putting in any of your own money. This wisdom has been expressed in the work of Robert Kiyosaki who wrote the Rich Dad series of books and Donald Trump, who is well-known for making deals while putting his reputation, rather than his money, on the line. What is omitted from these men's work is that Trump inherited $100 million, providing him with the kind of collateral and contacts that bring the world of very high financed borrowing, and that Robert Kiyosaki has never once proven to have made money outside of entertaining books about investing. Knowing this, we must consider the following essentials to financing a new business.

Personal Guarantees Against Loans

Having a great business idea without anything to back it up will leave you struggling to find capital. Your back-up to the borrowing can include accounts receivable already in place, cash, equity in your home, or your 401(k). The money will not come freely; it must be guaranteed by something when dealing with a bank. Private equity, on the other hand, may be found with nothing to guarantee the risk being taken.

Investors may Seek Higher Returns

Nothing is free. Just as a bank wants to get its money back even if you fail, private investors want the assurance that while they may get nothing in the event of failure or claiming bankruptcy in Ontario, they will get much more in the event of success. According to McLay company, this could include 15% plus the principle, or 15% of the company. Don't overlook how much they may charge.

Expect to put in More Than Your Sweat

While Donald Trump and Robert Kiyosaki tell many stories of making investments while putting nothing down and reaping the rewards of passive income, the truth is that lenders and investors want to know that you've got something on the line. The best example of this is that of David Khasidy the founding president of SunRay Power Management. When Mr. Khasidy started SunRay, a green energy co. in New York City, he put up a substantial sum of his own money. This signaled to investors that he was a true believer and had much more to lose than the average greenie with a business plan. Today, SunRay is among the leaders in its industry and is rumored to be going to public in the next 5 years.

The main takeaway is that when obtaining financing for a new business there will be a trade-off. You will have to put up something you own or offer a piece of the business' success. In addition, it will put all involved at ease if you've got some skin in the game.