April 1, 2004
Q: I am a budding designer, specializing in high fashion for plus-sized girls/women. I want to launch my own line next year. I have a business plan, but I need startup money—approximately $25,000. I’ve thought of trying to get personal investors, but I don’t know how much of a return would be appropriate. How much of a profit should investors expect, and how much interest, if any?
—A.N. Roberson, Los Angeles
A: You are at the traditional first round of financing sources for a new business: the “Three Fs”—founder, family, and friends. Let’s start with the founder—you. How much of the startup money do you plan to contribute? The more money you raise on your own, the less you’ll have to borrow and repay (with interest). Also, it is easier to get others to loan you some of their money if they see that you are willing to put your own money at risk.
Now to the other two Fs. Investments from personal investors could be a good thing—if handled properly. You can accept the money as a loan or as an investment (meaning the person would gain part ownership of your business and might want a say in the decision making). Unless you want to bring in a business partner, I recommend you stick to loans, keeping control of your business. You should pay the loan back, with at least 6% to 8% interest, as soon as possible.
A great resource for this type of private lending is Circle Lending (www.Circle Lending.com), a Website that will help you structure personal loans for your business, along with billing and payment terms between you and the person loaning you the money.