You’ve got a great idea for a business…
It’s the dream of a lifetime…
You can barely sleep for the excitement of finally running your own shop, calling the shots, and being independent.
But once you get past the dream stage, reality sets in.
Starting a business, virtually any business, costs money.
One of the most important things you need to learn as an entrepreneur is how to raise capital.
It can also be one of the most confusing and frustrating issues to deal with. And the changes in the 2011 tax laws surrounding investment and small business incentives have muddied the waters even more.
To make it a little clearer for you and to cut through some of the confusion, keep these four things in mind:
1. Getting Outside Financial Help Can Be Difficult But Not Impossible
If your business is in the minority and you have incredible growth potential, you might luck out with a venture capitalist. However, very few small businesses actually get money from someone who didn’t start the business. If your business has a lot of assets that can used as collateral, you have a better chance of getting outside funding.
However, the 2011 tax laws have changed the rules a bit. There are some really good incentives for small business investment in the 2011 tax laws. Non-corporate individuals who invest in certain small business concerns in 2011 won’t pay capital gains taxes on the profits they make from their investment (as long as they hold their equity for at least 5 years). Talk to your tax professional to see if your business qualifies for this type of investment.
2. Remember the two C’s – Credit and Collateral
When you’re just starting out, your personal credit and collateral are extremely important. According to the Federal Reserve, most money that small business owners borrow is personally borrowed or guaranteed. In that case, the bank you’re borrowing from is more concerned with your credit than the great idea you have for a business. If you’re thinking about becoming an entrepreneur, keep a close eye on your personal credit.
3. Loans vs. Equity Investment
Everyone talks about venture capital but when it comes to financing new small businesses, venture capital investment is the exception more than the rule. Most companies that actually do manage to obtain financing end up with debt, not equity. A very tiny portion of new businesses obtain financing by selling equity in the business.
However, the 2011 tax laws make equity investment much more attractive. If you need financing, again, talk to your tax professional and see if your business qualifies for the capital gains tax exemption for your investors. If it does, talk to your family, wealthy friends and other investors about an equity stake in your business.
4. Consider Trade Creditors
Trade credit is probably the most common financial tool used by small business owners. Many suppliers will offer even the newest business trade credit to help them by their goods or services. Talk to the companies that supply the things you need every day to keep your business up and running. They may be willing to extend trade credit to your business to keep you coming back to them for their products.
When you’re just starting out in your own business, you have a million questions. And you can get a million different answers. Getting bad information or advice, especially when it comes to finances, can sink your business before it ever gets off the ground. The changes in the 2011 tax laws make this the perfect time to polish up your business plan and approach potential investors. But make sure you do your homework before you pitch the sale.
The Parents Estate Planning Law Firm, PC
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