Thursday, November 03, 2005

Funding Your Business with Angel Investors and Banks

Since I am a professional entreprenuer (self-annointed), access to capital has always been important. Here are a few ways that I have gained access to capital over the years.

Angel Investors
In the early days of RentQuick, I knew I would run into a problem where I could have a nice big order, but not enough projectors to fill it. So I needed to have a "war chest" to buy equipment on short notice. Of course, with a new business, banks were out of the question. Funding a business on credit card debt is stupid. The obvious choice was to find an angel investor to loan me money.

Luckily, I had some contacts who could help. I started by putting together a nice little proposal that showed income statements and balance sheets. I was able to cut a deal with two angels who would be paid interest annually. The loans amounted to $75,000.

Why debt? Debt is far superior to equity at that level simply because I would be able to retain 100% ownership and pay them off over time. Interest is deductable, unlike equity deals. Finally, I would not need to worry about having a partner in the business.

Later, when the business was more mature, I was able to start working with banks. The normal method of working with banks is to walk in to the branch with your hat in your hand and wait until a loan officer would meet with you. Usually, you would need to fill out lots of forms and wait until some faceless loan committee tells you if you can have some money.

I found that building a relationship with your bank, not just your loan officer, was helpful. Get to know the higher-ups in the bank. Let them know what you are up to. Let them see you in action. Talk to them weekly so they know about your during good times and bad. Don't just call them when you need the money. Banks take risks in lending to people. You can help them mitigate that unknown by letting them know you better.

On my earliest real estate deal, I needed alot of money to pull it all together. So what I did was pledge my savings (stocks, bonds, and CD's) as collateral. This helped reduce the risk to the bank and give them the assurances that I was committed to the project.

Another thing I have done with the banks is make sure they are paid back quickly. Paying the banks back quickly reduces the monthly interest expense and reduces the overall risk of the project. Sometimes, this upsets the banker, who only makes money when you pay interest.

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