Let’s talk about debt! I’ve touched on this before, but most businesses use a combination of both debt and equity when it comes to funding. I’ve covered the basics of equity in an earlier post, so today we’ll go over some important takeaways about debt. Debt can be really scary, but I want to preface this post by saying I do think there’s a time and a place when using it can be valuable for your future, whether that be for continuing your education or starting a business. We’ll go over the difference between good uses of debt compared to not so good uses, how most women fund their businesses, and some ideas for funding your own.
Good vs. Not So Good Debt
The way to think about debt is essentially that there’s good debt and bad debt. Good debt is something that you can equate to being an investment in something that is going to appreciate in value over time – like the value of a great education. On the other hand, using debt to buy something that’s going to depreciate over time—like clothes or cars—is not such a great use of debt. Every business has some level of debt on their balance sheet (a balance sheet is a summary of all of the assets and liabilities of a business) as does every government, including the United States.
An example of good debt would be taking out a student loan to go to a great school for a program that’s going to help your career, or putting it toward something that will increase in value over time. Taking out a loan to buy an investment property and renovating it with the assumption that it will go up in value by 15 or 20 percent over a specific period of time, is a great use of debt. To sum it up, using debt to get somewhere you couldn’t have gone without it is a positive practice. In comparison, purchasing a car that’s more expensive than you can really afford, and using debt to do so, is a bad use of debt since the car will only decrease in value.
I financed my Columbia MBA with a federal student loan. Clearly, I felt this is a good use of debt!
What Do Most Female Entrepreneurs Use to Start Companies?
Women in business unfortunately receive a very small percentage of private equity backing, whether that’s venture capital or any other kind of equity investment. This is mainly due to the fact that women aren’t encouraged to raise money. I’ve pitched to investors by myself, with other women, and with men — and the experience is different, it just is. I’ve learned that it is just harder for women to receive private equity backing because they’re held to a much higher standard than men in these types of conversations. Because of this, the vast majority of women in business utilize debt in order to grow their companies instead.
Let’s say you’re starting a business and you know you need $50,000 to invest a piece of machinery and ingredients in order to be able to sell $100,000 in products. You might want to take out a loan in order to make the investment, but the bank won’t give you one until your business has revenue. Because of this, I see so many women using credit cards to make their business happen. I also see a lot of women use money from friends and family, or their savings. I want to be clear about the fact that doing any of these things to fund a business that you really believe in isn’t a mistake—I just want you to be aware of the current reality.
So, What Are My Options?
1. Design a business model where your customers front the money before you incur expenses.
Let’s pretend you have a goal of becoming a builder, but you don’t have any money in your savings account to start your own business. Rather than purchasing supplies and putting the charges on a credit card, a better first step would be to get a contract to build the land before you incurred any real expenses. Let’s say there’s a real estate developer who needs to hire a builder to construct a retail complex on a piece of land. As a builder, you’d go and pitch your services to the developer. If he offers you the contract, the best move would be to say, “Great, I need a 30 percent deposit and then we’ll begin the work.”
This is just an example to show you how it makes sense financially to get money from your customer before you even buy a shovel (or any other supplies for that matter). This is a tried-and-true strategy from a business model perspective that means you get your customer to give you money upfront. If you’re cash constrained and you don’t have funding for a business, but you’re passionate about your idea, evaluate whether or not you could structure it like this. A modern take on this idea is crowdfunding campaigns, where you share your idea with the world and ask them to purchase the product before you even go to production. Once a crowdfunding campaign is successful, the funds it raises can be used to fund the initial expenses of the business.
For businesses that require a storefront, like a bakery or pet grooming shop, one of your best options would be to take your business plan to a bank and tell them that you’re looking for a loan. Keep in mind that if you decide to do this, you need to be prepared to personally guarantee the loan. It’s not that you necessarily need to have that money you’re borrowing in the bank, but you do need to know that if the business is losing money you’re going to have to find it somewhere else in order to pay the bill. This is why it’s so crucial to have multiple revenue streams (more on that later!)
2. Find people to invest.
This can be intimidating if you don’t have a strong network, but there are ways to find people who would be excited about investing in your company. A lot of it comes down to research, networking, and a strong ability to pitch your ideas. As I mentioned above, many people turn to their family and friends to ask for investments, which is a great option for those that are comfortable with it and have that support. For others that feel this isn’t an option, angel investors can potentially help.
An angel investor is a high net worth individual who provides financial backing for small startups or entrepreneurs. Investopedia explains that the funds an angel investor provides may be a one-time investment to help a business get off the ground or an ongoing injection to support and carry a company through its early stages. These kinds of investments are typically seen as risky, but there are plenty of investors who are willing to partake. I’d recommend looking for lists of local angel investors, like this one that’s targeted toward the New York area.
3. Apply for a consumer credit card.
Depending on your credit rating, you can most likely qualify for a consumer credit card, which is one of the easiest forms of capital to access. The catch: consumer credit cards are expensive. They typically have interest rates between 15 to 25 percent, which is really high when compared to other types of capital. An interest rate on a bank loan would usually be more along the lines of 6 to 10 percent, so there’s a pretty significant difference. As far as equity goes, there’s no interest rate to worry about (unless it’s structured into the deal in some sort of format, like convertible notes which are investments that start out as loans and convert to equity in the future – but I might be making this a bit too complicated for the moment). Equity is just an investment based on the hope of a company being valued higher in the future, making the initial investment increase over time.
4. Spend time working for a similar business.
Just like you set up informational interviews while you were figuring out which career path you wanted to take, a smart way to feel out whether or not your business idea is something you want to pursue is to get involved. If you wanted to open a shoe store, for example, I would encourage you go work at the best privately owned shoe store in your area. Not only would you get a front row seat to seeing how that business is run, but it would ultimately lead you to making connections in the industry, and later provide you with invaluable resources should you decide to open something similar one day. This plan is a great option for an entrepreneur who doesn’t have a huge network and isn’t totally sure where to begin.
5. Take advantage of women in business clubs and events.
Be proactive! Do a quick Google search and look up the different events, conferences, and clubs that are happening in your area. Attending events or joining a club that’s business-focused is another way you can learn more about the industry, and you’ll make connections and gain a support system in the process. Websites like Eventbrite and Meetup are good places to check for these types of opportunities. Oh – and you can always ask me 🙂
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Have a question about funding? Drop it in the comments below!
Lead Photo Photographed by Lydia Hudgens