Every entrepreneur’s nightmare is trying to start or build their business and running out of cash. In fact, most entrepreneurs start and build their business on a shoestring budget. The SBA estimates that the average startup costs about $30,000, but most people don’t have that kind of cash lying around–even if they have a great idea for a business, or are driven to become a successful entrepreneur. So what are the options when you want to start a business but don’t have enough money?
Many entrepreneurs turn to personal or business loans to fund their efforts, but with only 20 percent of businesses surviving past their first year of operation, this option has a high risk of leaving them with thousands of dollars in debt. Others try bootstrapping, but never generate enough momentum to make the business a success.
You could also try to use crowdfunding or similar methods to help you fund your business, but in most cases, you’ll need to make a substantial investment in your marketing (and rewards for customers) before you can get that money. On top of that, there’s no guarantee your crowdfunding campaign will be successful–especially since only 31 percent of crowdfunding campaigns ultimately reach their goals.
So what’s left? Here’s an out-of-the-box idea that’s gaining popularity.
Financial leverage refers to an amount of debt that you can use to buy an asset–in this case, a business. Rather than using your own funds or taking out loans to start a business, simply identify an already-established business that’s up for sale, then leverage the existing assets and cash flow of that business to attract equity partners and lenders to fund its purchase.
Entrepreneurial consultant Gordon Bizar is a proponent of this technique, having used it to build, buy, and sell dozens of businesses. Now personally coaching entrepreneurs, Bizar has earned the nickname “Mr. Leveraged Buyout,” and encourages new business owners to take advantage of assets and capital that already exist to buy their businesses.
In this case, you and your partners will pool your assets and divide profits among yourselves, with conditions outlined at the beginning of the arrangement. You may also pay back your lender partners with interest.
There are several distinct advantages to this approach:
- Higher, faster earnings. First, since you’ll be leveraging assets and cash flow that already exist when you purchase an established business, you’ll already have an understanding of expected earnings and revenue growth trends. If you’re trying to establish a stream of revenue as quickly as possible, this is one of your best bets.
- Tax advantages. Depending on the specific circumstances, the interest expenses of financial leverage are tax deductible. That means the net cost of your interest rate isn’t nearly as much as it initially seems.
- Reduced risk. Since you won’t be using your own money to initially invest in a business (i.e., you won’t need to tap into your retirement savings or get a personal loan), there’s somewhat less risk involved in this method. However, you may still be on the hook for interest expenses if you don’t establish enough revenue to keep things moving, depending on the source and loans you use.
Research and Self-Development
It’s important to note that financial leverage alone may not be enough to guarantee your success. You’ll need to do your research to make sure you’re buying the right type of company, and you’ll need to perfect your own entrepreneurial approach.
For example, if you use $10,000 of your own money, and $90,000 of financial leverage to purchase a company that makes $10,000 of profit a year, you could end up in an unfavorable position if the company has a bad year and takes a $30,000 loss.
Still, as long as you understand the business you’re buying, you have the expertise and ability to manage and grow it, and you’re willing to put the effort in, financial leverage is one of the fastest and most accessible methods to becoming an entrepreneur while bypassing early growth stages and demands of a startup–especially for entrepreneurs with limited capital.