Friday, March 27, 2015

Other people's money

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     to help you better manage your small business.

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

     So, let's see. Your business plan is in place. Things are moving in the right direction. But the business is not generating cash as fast as you would like to grow. 

     You need other people's money. The usual sources like banks are not interested. You don't have enough experience in what you're doing. Your business is not old enough. Whatever.

     Example: Judy was renting a plot from a farmer. She specialized in growing greens and veggies for local markets. She had built up quite a clientele for her farm fresh produce, and she needed to expand. Searching around the area, she found a small farm for sale. The problem was money. Judy did not have enough cash for a down payment, and even if she did, no one would approve the loan. On the back of the property she noticed there was a fairly large grove of black walnut trees. It took some negotiating, but Judy managed to buy the farm. She knew that walnut wood went for big bucks, and she got a sizable commitment from a sawmill to buy the walnut trees. Then she got a commitment from the property owner to sell at an agreed price. With all this in hand, she approached a private lender who agreed to advance the funds and hold the mortgage on the property. It was a matter of bringing all the pieces together and closing the deal. 

     Example: Leland was a young man in the landscaping business. One of his on-going jobs was to take care of the grounds of a small apartment building. The owner of the property was impressed with Leland's work and asked if he wanted to buy the building. Leland jumped at the chance, but he 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 that the owner was willing to hold. They put in place a long-term large first mortgage at a normal interest rate and a short-term second mortgage at a much higher rate. Income from the rent rolls covered both monthly payments. If Leland didn't make the payments, the owner would take back the property and put it up for sale to someone else. Leland is still a landscaper, but he owns the building. The second mortgage is paid off, and he's making payments on the longer-term mortgage.

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

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

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


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