Personal Balance Sheet

By filling out a personal balance sheet, you will be able to determine your net worth. Finding out your net worth is an important early step in the process of becoming a business owner because you need to find out what assets are available to you for investment in your business.

Assets		Totals
Cash and Checking
Savings Accounts
Real Estate/Home
Automobiles
Bonds
Securities
Insurance Cash Values
Other
Total Assets	A	$

Liabilities		Totals
Current Monthly Bills
Credit Card/Charge Account Bills
Mortgage
Auto Loans
Finance Company Loans
Personal Debts
Other
Total Liabilities	B	$
Net Worth (A-B=C)	C	$

“If you think you can,
you can. And if you
think you can’t, you’re
right.”

—MARY KAY ASH, FOUNDER
OF MARY KAY COSMETICS

If you have a 401(k) retirement plan through your employer and are starting a part-time business while you keep your full-time job, consider borrowing against the plan. It’s very common for such plans to allow you to borrow up to 50 percent of your vested account balance up to a maximum of $50,000. The interest rate is usually 1 to 2 percent above prime rate with a specified repayment schedule. The downside of borrowing from your 401(k) is that if you lose your job, the loan has to be repaid in a short period of time—often 60 days. Consult the plan’s documentation to see if this is an option for you.

Another option is to use the funds in your individual retirement account (IRA). Within the laws governing IRAs, you can actually withdraw money from an IRA as long as you replace it within 60 days. This is not a loan, so you don’t pay interest. This is a withdrawal that you’re allowed to keep for 60 days. It’s possible for a highly organized entrepreneur to juggle funds among several IRAs. But if you’re one day late—for any reason—you’ll be hit with a 10 percent premature-withdrawal fee, and the money you haven’t returned becomes taxable.

GOOD BENEFITS

If you have been laid off or lost your job, another source of startup capital may be available to you. Some states have instituted self-employment programs as part of their unemployment insurance systems.

People who are receiving unemployment benefits and meet certain requirements are recruited into entrepreneurial training programs that show them how to start businesses. This gives them an opportunity to use their unemployment funds for startup, while boosting their chances of success.

Contact the department in your state that handles unemployment benefits to see if such a program is available to you.

If you are employed, another way to finance your business is by squirreling away money from your current salary until you have enough to launch the business. If you don’t want to wait, consider moonlighting or cutting your full-time job back to part time. This ensures you’ll have some steady funds rolling in until your business starts to soar.

People generally have more assets than they realize. Use as much of your own money as possible to get started; remember, the larger your own investment, the easier it will be for you to acquire capital from other sources.

Friends and Family

Your own resources may not be enough to give you the capital you need. “Most businesses are started with money from four or five different sources,” says Mike McKeever, author of How to Write a Business Plan. After self-financing, the second most popular source for startup money is composed of friends, relatives and business associates.

“Family and friends are great sources of financing,” says Tonia Papke, president and founder of MDI Consulting. “These people know you have integrity and will grant you a loan based on the strength of your character.”

WARNING

Watch out for the relative or friend who agrees to lend you money even though he or she can’t really afford to. “There will always be people who want to do anything they can to help you, who will give you funds that are critical to their future just because you ask for it,” says Mike McKeever, author of How to Write a Business Plan. “These relatives will not tell you they really can’t afford it, so you must be extra perceptive.”

It makes sense. People with whom you have close relationships know you are reliable and competent, so there should be no problem in asking for a loan, right? Keep in mind, however, that asking for financial help isn’t the same as borrowing the car. While squeezing money out of family and friends may seem an easy alternative to dealing with bankers, it can actually be a much more delicate situation. Papke warns that your family members or friends may think lending you money gives them license to meddle. “And if the business fails,” she says, “the issue of paying the money back can be a problem, putting the whole relationship in jeopardy.”

The bottom line, says McKeever, is that “whenever you put money into a relationship that involves either friendship or love, it gets very complicated.” Fortunately, there are ways to work out the details and make the business relationship advantageous for all parties involved. If you handle the situation correctly and tactfully, you may gain more than finances for your business—you may end up strengthening the personal relationship as well.

The Right Source

The first step in getting financing from friends or family is finding the right person to borrow money from. As you search for potential lenders or investors, don’t enlist people with ulterior motives. “It’s not a good idea to take money from a person if it’s given with emotional strings,” says McKeever. “For example, avoid borrowing from relatives or friends who have the attitude of ‘I’ll give you the money, but I want you to pay extra attention to me.’”

Once you determine whom you’d like to borrow money from, approach the person initially in an informal situation. Let the person know a little about your business, and gauge his or her interest. If the person seems interested and says he or she would like more information about the business, make an appointment to meet with them in a professional atmosphere. “This makes it clear that the subject of discussion will be your business and their interest in it,” says McKeever. “You may secure their initial interest in a casual setting, but to go beyond that, you have to make an extra effort. You should do a formal sales presentation and make sure the person has all the facts.”

A large part of informing this person is compiling a business plan, which you should bring to your meeting. Explain the plan in detail, and do the presentation just as you would in front of a banker or other investor. Your goal is to get the other person on your side and make him or her as excited as you are about the possibilities of your business.

During your meeting—and, in fact, whenever you discuss a loan—try to separate the personal from the business as much as possible. Difficult as this may sound, it’s critical to the health of your relationship. “It’s important to treat the lender formally, explaining your business plan in detail rather than casually passing it off with an ‘if you love me, you’ll give me the money’ attitude,” says McKeever.

TIP

A business plan sets out in writing the expectations for the company. It shows family members who are putting up the money what they can expect for their contribution. And it helps keep the entrepreneur—you—mindful of responsibilities to family members who backed you and keeps you on track to fulfill your obligations.

Be prepared to accept rejection gracefully. “Don’t pile on the emotional pressure—emphasize that you’d like this to be strictly a business decision for them,” says McKeever. “If relatives or friends feel they can turn you down without offending you, they’re more likely to invest. Give them an out.”

Putting It on Paper

Now it’s time to put the loan in motion. First, you must state how much money you need, what you’ll use it for and how you’ll pay it back. Next, draw up the legal papers—an agreement stating that the person will indeed put money into the business.

Startup Costs Worksheet

The following two worksheets will help you to compute your initial cash requirements for your business. They list the things you need to consider when determining your startup costs and include both the one-time initial expenses to open your doors and the ongoing costs you’ll face during the first 90 days.

Startup Capital Requirements

One-time Startup Expenses

Startup Expenses	Description	Amount
Advertising	Promotion for opening the business
Starting inventory	Amount of inventory required to open
Building construction	Amount per contractor bid and other costs
Cash	Amount needed for the cash register
Decorating	Estimate based on bid, if appropriate
Deposits	Check with utility companies
Fixtures and equipment	Use actual bids
Insurance	Bid from insurance agent
Lease payments	Fees to be paid before opening
Licenses and permits	Check with city or state offices
Miscellaneous	All other costs
Professional fees	Include CPA, attorney, etc.
Remodeling	Use contractor bids
Rent	Fee to be paid before opening
Services	Cleaning, accounting, etc.
Signs	Use contractor bids
Supplies	Office, cleaning, etc.
Unanticipated expenses	Include an amount for the unexpected
Other
Other
Total Startup Costs		$

Startup Capital Requirements

Ongoing Monthly Expenses*

Startup Expenses	Description	Amount
Advertising
Bank service fees
Credit card charges
Delivery fees
Dues and subscriptions
Insurance	Exclude amount on preceding page
Interest
Inventory	See ** below
Lease payments	Exclude amount on preceding page
Loan payments	Principal and interest payments
Office expenses
Payroll other than owner
Payroll taxes
Professional fees
Rent	Exclude amount on preceding page
Repairs and maintenance
Sales tax
Supplies
Telephone
Utilities
Your salary	Only if applicable during the first three months
Other
Total Ongoing Costs		$
Total Startup Costs	Amount from p receding p age e	$
Total Cash Needed		$
*Include the first three months’ cash needs unless otherwise noted.
**Include amount required for inventory expansion. If inventory is to be replaced from cash sales, do not include here. Assume sales will generate enough cash for replacements.