Friday, August 15, 2014

Other people's money

     Free daily tips, information and advice for small business
     from a lifetime of personal experience--been there, done that.

     Money is always a problem in small business. There is never enough.

     Your business plan is in place. And things are moving in the right direction. 

     But the business is not generating cash as fast as you would like. You might need other people's money so you can grow faster--or expand into another business entirely.

     Example: Jim was in the home improvements business. He worked job by job, installing doors and windows, putting up siding, and roofing jobs. He used the 9/10 mechanism to borrow money. It works like bonds--I give you $9 and you pay me back $10. Jim approached friends, relatives, acquaintances with this simple proposition. Each person would loan him $900 and he would pay them back $100 a month for ten months. This is not cheap money, but when the bank turns you down your alternatives are few. Jim found one person who agreed to give him $9,000 to be repaid at $1,000 per month for ten months. Jim was careful to keep all accounts separate, using the loans to buy tools, equipment and materials for specific jobs. When a job was done and his customer paid him, he set enough money aside to pay off the 9/10 loan. 

     Example: Robert was also in the home improvements business. He worked with his customers to finance each job. He required one third payment upfront, one third payment when an agreed-to milepost was reached, and the final one third payment when the job was completed. This method can be used in other types of businesses as well. Just remember that the profit for the job comes in that last payment.

     Example: Leland was a young man in a hurry. He was a landscaper. One of his on-going jobs involved taking care of the yard around a small apartment building. The owner of the building was impressed with Leland's work and asked Leland if he wanted to buy the property. Leland jumped at the chance, but told the owner that he could not afford it. Maybe yes, maybe no said the owner. He showed Leland how to take over the property with two mortgages--a large first mortgage at normal interest and a second short-term mortgage at a higher rate of interest. Income from the rent rolls would cover the mortgage payments. With time, Leland would own the building. If he did not make the payments, he would be in default and the owner would take back ownership of the building. Leland is still a landscaper but with a difference--he owns the building where he cuts the grass and trims the shrubbery. And he has his eye on another apartment building in the same neighborhood. 

     Using other people's money in business is quite common. It takes many forms, but the mechanism is concept is the same. Put it to work and home in on the specific arrangement that helps you start-up, grow and expand.

     When your supplier delivers and hands you an invoice due in 30 or 60 days, you are using other people's money. It's a matter of trust that you will pay your bills on time. That simple concept of trust is at the heart of using other people's money.  

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