This training teaches the specific steps that you need to take to raise money in a challenging economy.Sign Up to Watch
-Now, business coaching hint, there's a website called angellist.com, if you haven't got a chance to check it out, and it's kind of fun because it shows angel investors and the kinds of things they have invested in the past.
SEAN KOUPLEN: Yeah.
-And to even be up on that site, you have to be an accredited investor. And we won't get into all the nuances, but you can actually see angel investors and what they've invested in the past. It's a really, neat, neat tool. We encourage you to check it out if you want to start a business. Before I move on this next one, I want to ask your opinion here. What was your opinion of the character Khan from "Star Trek Two, the Wrath of Khan"?
-I haven't seen.
-I haven't seen it. No.
-It just goes to show you. OK, so business coaching for source Number Seven--
-I'm just being honest. I'm just being honest.
-He's being candid. He's being candid here. A good leader doesn't watch "Star Trek Two". So business coaching for source number seven, Personal Avenues. The pro. Funding through personal avenues can to keep out of other funding situations that require a lot of regulation, forms, and paperwork. But the con is that these funding avenues can often cause you added stress. Provide for me an ample example of this real quick.
-Here's the best case scenario if you can do it. If you can start or expand a business and you have the cash to expand it, there's no dilution, nobody's telling you what to do, I mean, it is a best case situation. You just have to make sure you have enough cash and you need to maintain enough savings and liquidity to continue to live. So you can't just deplete everything you've got because if it doesn't go well, you really have no fallback position.
-Yeah. Now if you're watching this business coaching segment, again, the reason why we're going over all these options is because you might have a little, like a combo move. Maybe you put in your own money, and then you go get angel investor.
SEAN KOUPLEN: Right.
-Maybe you put in your own money and then you go get venture capital. Or maybe-- there's all these different ways you can do it and all these sources can come together to complete the whole. So don't feel like it's all or nothing for each one of these.
-In fact, I would say the most common of all would be to put in some of your own money, go find an angel investor as a partner, and then go to a bank or credit union to get the funding. That is an ideal scenario, when you're really using three of these all together.
-For my small mind, and maybe any Thrivers out there who are just trying to comprehend that, you mentioned there's the three steps. Can you share it one more time, just so we can really get it?
-Sure. Yeah. Again, what will typically happen is you'll have personal savings or dollars that you can put in, then you'll go find oftentimes an investment partner. And what that add is they add financial strength so that you can go get bank financing.
The fact that you've put cash in doesn't guarantee bank financing because you've got to understand, as the banker, you're looking at it and going this is a brand new venture. Will it work? Can they make the payments on the loan? And if they cannot make the payments, what do I do at that point in time? So if there's not a lot of collateral, if a lot of it is really just an operating company investment, you don't have collateral, so that's why they like that investment partner.
So oftentimes you can bring in an investment partner for less than 50%, you still maintain control, but the bank feels comfortable because they've guaranteed the debt, and if things don't go well, they can go to them. So you can get that low source of capital from a bank without giving up control in your company.
-That right there is unbelievable. All right, moving on here to business coaching for source number eight. source number eight, savings. The interest rate on money that you have to invest in yourself is effectively zero.
SEAN KOUPLEN: Right.
-The con is that the money you have saved is generally the money you have earned, so it is often painful to see it go and you may not have much of a cash cushion.
-That's kind of what we were talking about earlier. This is a great source of capital, it's the best source of capital. You just don't want to deplete all your savings. Because you do have to-- and this is very difficult for us entrepreneurs-- we do have to realize that there is a chance that things will not go well and we do need to have a backup plan in the event that they don't. And so if you've depleted all your reserves in cash and things don't go well, you could be in a tough situation.
-If you're out there and you don't have a backup plan, just talk to your mom. See if that couch is open. You know, mom sometimes-- usually mom's more conservative of an investor and she usually has a nice couch and you can sleep on that with your five kids or something.
-Mom will say it's a bad idea, I can tell you. So don't listen to mom too close.
-OK. So moving on to business coaching for source number nine, borrowing against equity. The pro is you can generally borrow against your equity at a fairly low interest rate. Banks are typically easy to work with on these kinds of loans here. The con is that if your investment goes bad, you may lose your house. Ample example, my friend, can you share with us?
Many people begin their businesses by using a home-equity loan. And the advantage is, oftentimes it's interest only. So you're only having to pay interest on the outstanding balance. So if it's a small payment, but if you get to the point where you cannot make the payment, the bank clearly has the right to foreclose and that would not be good.
CLAY CLARK: Not good.
-So business coaching for source number 10, the 401K. Pro, this is capital that many historical savers may have relatively quick access to. If you're somebody who's constantly contributing to your 401K, you can probably get access to that pretty quickly. The con is that raiding your retirement savings to fund a business can often be very scary for you. Sean, ample exam.
-Well, this is a great get check. So here's what we see, here's what I see, oftentimes with people that have an idea for a new business, OK? They have the idea, they're ready to go, but they want to use your money as the investor to do it. They don't want to use theirs.
So if you think, OK, I've spent the last 10, 20, 30 years saving into my 401K, worked hard, saved all this money, would I take it and put it into this investment? If the answer is no, you probably shouldn't do the deal. If the answer is yes, then you probably have a winner.
That doesn't mean you have to do it, but typically there are ways to borrow against a 401K that are very flexible and advantageous. And many times you can basically take the 401K if you leave the company and roll it over into an IRA, or an individual retirement account. Your financial professional can help you do this, and then either borrow against or withdraw that money as well.
So it's basically just using that money that you've saved up. Many times people will go I don't want to do this because there's a 10% penalty for withdrawing from an IRA. But compared to giving up a large portion of equity in your company, this may be a better deal.
-And Sean, you referenced it, but I want to make sure we're super clear with the Thrivers out there. You're going to want to work with a financial planner, someone who's a licensed certified person, if you're going to attempt to do a 401K rollover or something with that. And just a little wisdom there for you. So business coaching for source number 11, the credit cards. The pro, quick access to capital is always just a card swipe away.
SEAN KOUPLEN: One swipe.
-The con is that if you decide to make payments rather than paying off the card in full each month, or not make payments altogether, your interest rates could be extremely and punitively, punishingly high. Ample example, Sean,
-Well, this can be, again, credit cards are nice because the minimum payment on credit cards are typically very low. So there's not a lot of debt service required. However, they are extremely expensive. Business coaching lesson: So you're going to get into default rates of 16, 18, 21% if you end up running into problems here.
So this would be one that I would only use if you are 100% sure that it's going to work and you're going to have quick access to cash flow. So this is very important. Business coaching advice: You don't want to use credit cards to fund something that's a great idea but the payday is way out in the future, because you have to have a way to pay those credit cards back.
-So business coaching for source number 12, the owner carry we talked about earlier. The pros is your risk is essentially shifted off of your plate and onto the plate of the person who is carrying the financing.
Con is this type of funding is hard to come by because you're asking somebody else to, basically what you're doing, I guess, Sean, is you're saying that, the person buys your business, you have to say, I trust you enough to pay me on time for the next three, four, five years. And so it's sort of that, you can have my business but you don't have to pay me right now. And it's sort of-- can you give me an ample examples of this one here?
-Well, this one is much easier when you know the person whose business you are buying.
-So if you know them well. If they come to you through a business broker or a referral or something, it's much tougher. Owner carry is really about creating trust in yourself, OK? So they're looking at you as the buyer.
I would have a much easier time today getting an owner carry because of the different companies and you know, the bank and other assets that we own, because the seller of the business would say, well, he's not going to let these things go under. He's got a lot to lose and he's got a lot of resources to pay us back from.
When your early in your career and you don't have the resources, and you don't have the income, you don't have those types of things, this is tougher, but it can still happen. Business coaching tip: You just need to create an emotional connection and a high level of trust with that seller.
-And we have a lot of business coaching episodes about this, but having relationships is always the big thing that keeps deals and business together. You have to be a relationship person. Can't just be a logical move here, or it's not going to work.
Now Sean, we're talking now about business coaching for the five C's of credit. And we're going to getting into these five C's and really just having you clarify how we build up this credit history there. So for this section, I'm going to read a dictionary definition of each one of these terms. And I'm relying on you to drop the fire hose of knowledge on us and explain to us what it means on kind of a third grade level for people like me who maybe aren't grasping.
So business coaching for the five C's here. Here we go.
Business coaching for One. Cash flow. As defined by our good friends at Investopedia.com, it's an accounting statement called the statement of cash flows. It shows the amount of cash generated and used by a company during a given period. Sean, in language I can understand, what does cash flow mean?
-First and foremost, the reason that we want to cover the five C's of credit is these are important to banks, if you're going there to get-- banks or credit unions-- if you're going there to get financing. But it's also important to investors. These are the same things that when you're talking to an investor, they're going to want to know as well.
So cash flow is simply your ability to pay back the debt. How much net profit or free cash is being generated by the business, or can be generated by the new business. One or the other.
It's the most important C in the five C's of credit, because without cash, a loan or investment cannot be repaid. So C number one is cash flow.
Moving on to business coaching for C number two his credit history. As defined by our good friends at Investopedia.com, a record of a consumer's ability to repay debts and demonstrated responsibility in repaying debts. A consumer's credit history consists of information such as number and types of credit accounts, how long each account has been open, amounts owed, amount of available credit used, whether bills are paid on time, and a number of recent credit inquiries.
Sean, break it down for us. Credit history. What are we talking about?
-The reason that people almost always ask about your credit score is because it is an indication of really two things. One is your ability to repay. And the fact that you have not overextended in the past. And two, your organization.
So for example, many doctors have the ability to repay, they have a very large income, but they're so busy and they don't manage their affairs very well, so they don't pay their bills on time. As an investor or a banker, you want both. We want somebody who can repay and doesn't get overextended to where they can't. But also is organized enough that they will repay on time. And you don't have to manage the relationship heavily.
-OK. OK. All right. We're moving on to business coaching for C number three. We're talking about collateral. As defined by our incredible friends at Investopedia.com, collateral is defined as property or other assets that a borrower offers a lender to secure a loan. If the borrower stops making the promised loan payments, the lender can seize the collateral to recoup its losses. What are we talking about?
-You know, banks do not want to foreclose on homes. They don't want to repossess cars. They don't want that.
They want you to make the payments as you have agreed to make them. Things happen. And we understand that. And when things happen, our preference would be that you sell those assets on your own and pay the loan back.
In a worst case scenario where really bad things happen and you do not choose to sell the collateral, we have to do that for you. So collateral is basically just anything of value-- real estate, cars, investment accounts, equipment, accounts receivable, inventory. It's really anything of marketable value that in the event that a loan is not repaid, we can go take the ownership of, sell, and pay the loan back.
-And again, banks don't want to take your stuff back. They want you to pay the loan back. But this is just something to make sure we're aware of these terms. Sometimes not knowing these terms can exclude us from opportunities. Because we're just not-- not ignorant people, but maybe ignorant of these terms. And it makes us where it's hard for us to get in the game here. So we want to have a mastery of these terms.
-And the importance of learning the term collateral is it's going to be critical when it comes to getting bank financing. It's not going to be as important when you're bringing an investor in and they're buying part of your company. But if you want to get bank financing, which is really the cheapest financing you can get, you have a much better chance if you have collateral to back the loan.
Send us your email address, and our team of elite minds will get right on it.