How to Build Wealth Using Other People's Money
Whether you are a serial entrepreneur or thinking about starting your very first business, the process of creating and scaling a profitable company is challenging for anyone.
You have to deal with funding, competitors, regulations, and growing pains — not to mention unexpected challenges, such as an international pandemic. It’s no wonder, then, that nearly 45% of businesses fail within their first 5 years and only 25% new business ventures make it past 15 years. This is according to the U.S. Bureau of Labor Statistics.
With so much on the line, is it possible to build wealth using other people’s money? Is there any way to grow a successful business without having to put your personal finances and your family at risk? Here are some options every business owner should consider.
Fund Your Business: Top Startup Financing Options for Growing Companies
Many businesses begin with sweat equity and personal investments from their founders. But if you know how to leverage your network and the viability of your company, you can grow using OPM: Other People’s Money.
The “secret” of major corporations and their CEOs is that they know how to properly use the power of leverage.
In short, leverage gives businesses the opportunity to amplify their growth and position in the market. Leverage is borrowed money that is used to invest and grow the company. When it comes to scaling a business and building wealth, leverage can be used to launch new projects or product lines, finance the purchase of inventory, hire key players, or expand operations.
So this raises the question: how can you get other people’s money to grow your business and build wealth?
Option #1: Private Money
Private funding is a viable option for small business owners that are looking to access cash quickly. One of the key benefits of private funding is that you don’t necessarily have to give away stake in your company.
Consider the different types of private money that don’t require you to give up any ownership:
Personal investments from your own savings
Cash from family and friends who believe in your venture
Investments from individuals on crowdfunding websites
Of course, you can also get money from a private investor (more on that below), but that typically involves offering stake in your business. The benefit of an accredited investor, though, is that you can receive guidance and mentorship from someone who has experienced success before.
Obtaining capital can be the difference between a company that stagnates and a company that thrives.
Option #2: Angel Investors
Angel investors are people who are accredited investors (meaning they have a net worth of at least $1 million and an annual income of $200,000) that are looking to invest in new or small business ventures. Because they have the spare cash available, they are looking for higher rates of return compared to traditional investments. Typically, they are expecting 25 to 60 percent or more return for their money.
The biggest advantage of angel investments is that it is less risky compared to debt financing. If the business fails, the invested capital does not need to be repaid. However, in exchange for the monetary risk, angel investors often seek equity in your company. This means that you will no longer have complete control, as the angel investor is now a part-owner. He or she will have a say as to how the business is run and managed.
Some key things to know about angel investors:
Angel investing is extremely risky, as the investor can lose the entire investment if the company goes under. Therefore angel investors generally only invest in companies with proprietary technologies, strong growth potential, or people that they fully trust and believe in.
According to Forbes, the typical angel investment into a company ranges between $25,000 to $100,000. Entrepreneur, on the other hand, says that the average investment is around $600,000, though this number is likely skewed by just a few high-ticket investments.
Most angel investors expect anywhere from 10 to 50% of your business, so be prepared to part with a bit of equity. The upside, however, is that you do not have to get into debt to finance your business. Just be sure you know how much equity you are willing to part with.
At the end of the day, an angel investment should be mutually beneficial. You should be able to benefit from the capital and guidance from an investor, whereas the angel has the potential to earn higher rates of return from their investment.
Getting a Loan
One of the more traditional ways to get wealthy using other people’s money is through taking out a business loan. Bank loans for businesses have low interest rates, making them a popular choice. However, banks require that the business shows some signs of success, stability, and longevity before they are willing to lend out money.
If you are unable to get a loan through a local bank or credit union, we recommend checking out the Small Business Administration. They have a loan guarantee program for businesses of every size. The micro-lending program has loans smaller than $50,000, whereas larger businesses can qualify for loans up to $2 million.
The primary benefit of loans is that unlike investors, the bank will not own any of your company. You simply pay back the loan on their terms.
Option #4: Venture Capital Investments
The primary difference between angel investors and venture capital investments is what money is being used to invest. Angel investors are accredited investors who put their own money into companies that they believe in. Venture capital, on the other hand, is money that is pooled from investment companies, large corporations, or pension funds. In other words, the money that a VC uses to invest is typically not his or her own money, but someone else’s.
Another difference is that angel investors tend to invest early in a company. They do this in exchange for stake and a say in how the company will evolve and grow.
Venture capitalists tend to invest after the business is more established. They do this to avoid the risk of startups. But because the business is more established, venture capitalists are more comfortable investing much more money, often in the realm of millions of dollars.
Are You Taking the Right Steps to Grow Your Business?
In order to build wealth using other people’s money, you must prove that your business has a plan and a vision for the future. Whether you’re seeking money from family, investors, or a bank, they will want to know that their money is being used wisely and responsibly.
With that being said, it is important to make sure that your business operations are as streamlined as possible.
Have you optimized your workflows?
Is your marketing strategy efficient and effective?
Are your internal processes designed to scale?
Exceptional Services Agency specializes in helping businesses through Lean Methodology to scale efficiently and effectively. We have helped countless businesses grow into a higher level of success. Are you ready to learn more? Contact us today!