You all know by now that I am a huge advocate of leaving the big firms behind and starting your own entrepreneurial advisor business. I know, it can be a frightening prospect – especially if you’ve always worked for someone else and had a steady paycheck. However, as most independent advisors will tell you, the rewards are well worth the risk. One of the most common questions I get from those who are preparing to go independent or have recently made the move and want to grow is how to finance their new endeavor. My advice to them is always to grow slowly and never get ahead of themselves when it comes to borrowing money. Want a more in-depth answer? Here are my thoughts on funding your business.
Why It’s Important to Grow Mindfully
I know a lot of people enjoy being entrepreneurs because it gives them the freedom to serve their clients in the way they think is best. However, it’s easy to get too enamored with your business and think that because you’ve been successful in your first few years that it’s time to step up and achieve some explosive growth. This is almost always a bad idea. I’ve seen too many entrepreneurs get in over their heads because they borrow money based on the revenue they think they’ll make instead of on what they are actually making.
While growing your business through channels like mutually beneficial referral partners and discovering non-traditional ways to find prospects are smart, borrowing a bunch of money to open offices in places you’ve never been or tripling the size of your staff because you think they will ‘eventually pay for themselves’ is foolish. Mindful, slow growth is always better than attempting to grow before you’re ready (or have the money) to do so.
Now, that’s not to say that you can’t use some funding methods to achieve incremental growth. Sometimes, it’s necessary to take the next step in your business. If you find yourself in that situation, here are some options:
Line of Credit
A line of credit with a lending institution is probably my most recommended type of financing for entrepreneurial advisors. With a line of credit, you get a set amount you can borrow, but you only pay interest and principle on the money you actually take out. With a line of credit, you can borrow a few thousand dollars and use it to grow your business, pay that back, then borrow a larger amount to take the next step. The key is to always pay back the first amount before you go on to borrowing more.
A lot of new entrepreneurs have not yet built up the credit necessary to get a business loan or line of credit. In these cases, you can use your personal credit to fund your business, but be careful. Never borrow on speculation. Always borrow a little, use it to take a step forward, pay that amount back, then borrow more.
Of course, every new business owner is interested in investors. I mean, what’s better than other people funding your business, right? Well, I’m here to tell you that investors will only be interested in your business if you’ve already proven your concept and have a quantifiable return on investment. Even if you do have these things, you still need to abide by securities laws related to investors. So, if you think you have a proven service and you’re ready to seek out investors, I always advise that you retain legal counsel before you get started.
So what about asking for investments from those closest to you? I’ve advised many of the advisors I work with to counsel clients who want to loan money to family members. Hopefully, you’ve learned something from these interactions and understand all the possible pitfalls of borrowing money from friends and those related to you. If you still think it’s a good idea, you can certainly go this route – just be aware of how it can backfire.
Do you want to start your own financial planning business but don’t have the funds to do it? Or are you ready to grow your entrepreneurial firm and considering borrowing money to take the next step? Hopefully, this article has helped answer some of your questions. If you have more, please leave them in the comment section below!