What are some ways you can fund your business?

Now, up to date we have learned the finances, the types of buisness and how to run it, but how do we gain cash for these buisness ideas? There are many ways people may achieve finance for their companies but today I would like to bring forth two ideas :

Debt Financing: This type of finance is money borrowed. This is money you are obliged to pay back by a certain time and date. You will usually incurr monthly interest rates, which may or may not be a fixed rate depending on the type of loan you are taking out.

Advantages of debt financing : You as the owner are able to raise funds without having to give any portion of control or ownership to the public, as you would have to do in Equity Financing. You will also sustain the amount of cash needed to run an operate your buisness daily needs.

Disadvantages of debt financing: Your business is serviced to a debt, and must oblige to all agreements or subject to default on loan.  The interest on these loans may be relatively high as well.

                                                                   VS

Equity Financing: This type of finance is also known as Venture Capital. This type of finance will require making a company public and selling shares and or parts of ownership in order to generate enough funds to start your business.
* Note  Venture capitilist always expect a high return on their initial investment.

Advantages of equity financing: The business will not be listed as collateral incase of loan default. You will have suffiecent amount of funds to start up your business, as well as more finance for capital product.

Disadvantages of equity financing: Shareholders have some ownership in the company, and business profits must be given out in forms of dividends. You may also have to provide your venture capitalist with a large portion of ownership rights to all major decisions.

These are some ways to generate enough funds to operate your business successfully.  Before opening a buisness you must look at all the cost, and go over it with your financial planner to decide which option is best for you, if you find that these may not be great options for you consider looking into Franchise's which are known as "Put the key in the door and start" business, where all is done for you.

The idea of being penniless on paper

Last post I left you with a question , using the prior example how could we make ourselves appear penniless on paper? The idea of making ourselves penniless on paper is one great key to financial success, because I have mentioned numerous times the market is not safe, investing is risky and if your not willing to take the risk your not on the path to becomming a successful investor. A great investor will have plans for each market, whether the economy is doing great or poor, they have a plan to make it work for them.  Which brings me to my point of being penniless on paper. You always see people become instant millionaires from a great idea, facebook is a prime example. But what happens to a lot of these instant millionaires, they have never learnt to invest their money like the rich do, so they loose it they go bankrupt. Whether it be over a lawsuit or over spending of money.  This is because they did not properly secure their assets to make themself look poor, but their business rich.

When owning a corporation you and your business are seperate legal entities, anyone owning a sole propriotorship or partnership, if the business fails one or both partners is legally endebted to any liabilities, which can be paid off with personal assets like your home and cars if the partners defaulted. I believe that a corporation is the best choice because it is the most secure for the founder.

The idea of being penniless on paper is transfering all your assets into your business. Make your business earn the money , not you. When your business is the one earning all the money, one paper you can recieve many tax incentives, and breaks as well as keeping yourself secure incase of a lawsuit towards you it cannot directly harm your business or a lawsuit towards your buisness cannot directly effect you. Knowing how to harvest the idea of being penniless on paper will reward you greatly in your future endvaours.

Three Types of Income

Throughput the weeks I have touched upon the subject of creating more than one plan for yourself in order to be successful you must always have a plan no matter the situation, lets refer back to the three types of lifestyles : Secure, Comfortable and Rich.  Just as I had said in order to prepare for being rich, you must prepare for being secure and comfortable as well, I cannot stress enough that one willing to take these steps must create each portfolio for themself.  Today I would like to introduce to you the Three types of Income :

 

 

1. Ordinary earned incomeThis type of income is what mainly the poor, or middle class focus on. This income is generated from wages, or paychecks from a secure or comfortable job title that you may have aqquired with or without post secondary degrees. This income is also the highest taxed income , which makes it harder for you to become rich by simply saving your money.
2. Passive income
This type of income is usually derived from many different entities. One may earn a passive income from license agreements, or patents to a product, or even through real estate.  Real estate is a major factor in creating your passive income. This type of income has many tax benefits.

3. Portfolio income
This type of income is what we will call "Paper Assets." Paper assets such as : Stocks, Bonds and Mutual funds. On an investment stand point this portfolio income is by far the most popular, this is because of new technology, everything as I mentioned is paper assets, it is far easier to maintain and track tons of investments because it is all generated online through markets.

 

 

From the diagram drawn above , this is the direct corrolation between the three types on income. Simple really, you want your ordinary income, to convert into passive and portfolio income. Like I mentioned earlier the difference between the rich, and the middle class/poor is that the rich focus on their portfolio and passive income, where the poor and middle class focus on their ordinary income. Let me give you an example :

Say you have landed yourself a job at a local bank, the job seems secure enough good pay so you keep it, you are generating an ordinary income. With these wages you tell yourself its a good time to invest in the real estate market, so you buy a house worth $80,000 for $60,000 on a forclosure auction. You now have generated $20,000 profit for simply investing in the porperty, you find a new couple who would like to rent out the home for $1400 a month, now your simple investment has made you a profit of $20,000 and is also generating you a passive income because you now earn a monthly $1400 for rent.  With this new found cash you go to your financial advisor and say you want to invest in some stocks, mutual funds and or bonds. Remember investing is risky and does not always have a positive output, but a great investor knows how to invest in a good and bad market, but for this case we will say you made a profit of $30,000 on your initial investment. You can see through this example that your Ordinary income generated a Passive Income which then generated a Portfolio income. This brings back into play your assets paying off your assets creating strict profit for yourself, for further explination for any new followers to this blog please refer to earlier blog postings to get up to speed.

I want to leave you with the idea of creating your three types of income, and stump you with a question. From the example listed above, how can one create a profit but seem penniless on paper?

Is your time and asset or a liability?

In earlier discussions we discussed the difference between and asset and liability. Today I would like to ask you : Is your time your most valuable asset, or is it your worst liability? Many would argue that time is a liability because you cannot gain more time, we are not promised time, so why would time be considered an asset, would it not be a liability? Time is determined on how you use it. To me time would be my most valuable asset, why? Time is not given to us, time gives me a dealine , time will give you the opportunity to set a goal and to do whatever it takes to accomplish that goal by your deadline. Time can be your most valuable asset, but your worst enemy. I touched upon the topic in my previous post that most people want to become rich, but almost none of them are willing to put the time and effort in , to succeed.

Let me ask you this, are you willing to put your time in to become rich and successful? Would you attend classes to further your education?

I want to leave you with the concept deprived from the book : Rich Dad's guide to Investing  by: Robert T. Kiyosaki, the Three E's To Success:

•    Education
•    Excess Cash
•    Experience
  I encourage readers to tell me what they believe these three E's have to do with success? What do you believe is the most valuble of the three?
  I will touch more about this concept in my later posting.

What is a real asset?

Most people today want to be rich, but no one is willing to learn. Like I have constantly stressed , the importance of financial literacy is more than knowing the definition of a word, but to understand the meaning. Many people want to become a rich investor, but many do not know the simple difference between an asset and a liability. An asset in the simplest terms is something that puts money into your pocket , where a liability is something that takes money out of it.  The distinction between the two can be shown the examples below for further understanding.

                        (Image taken from Rich Dad's Guide to Investing By: Robert T. Kiyosaki)
Please Note an asset puts money into your income, on your income statement.

   (Image taken from Rich Dad's Guide to Investing By: Robert T. Kiyosaki)

Whereas a liability will put money into your expense colum, in other words taking money from your pocket.

A viewer of this blog asked me a question "Why is it so important to be able to know the difference between being : Rich, Comfortable or Secure; the reason being can be deprived from the examples above. A Secure investor would have a balance sheet that is leveled between assets and liabilities. So although they may not be poor, they are also not in a situation to become rich.

A comfortable lifestyle would be the same as the "Average Joe" in regards to the balance sheet and income statement someone who is comfortable would show a minimal amount of assets while having a liability colum full.

A rich investor would have his assests pay off eachother as well as provide income for further investments as well as personal net income. I will go more into depth of what it takes to become a rich investor in my following blogs. For now I would like all readers to adapt and understand the basic meaning between an asset and a liability , it is crucial for any type of success in the financial industry.