Of course, everyone should be saving money, every month. But aspiring entrepreneurs looking to start a venture one day shouldn’t be saving the same way the masses do. And by that I mean would-be entrepreneurs should avoid dumping much of their savings into mutual funds, stocks, 401(k)s etc.
Let me explain why…
If you don’t believe that selling equity in your future business venture is the way to go to raise funding, then you better understand how to gain access to cheap credit from the banks.
In order to make sure you’re not tapping into your credit cards to start a business, you’re going to have to convince the bank to grant you a line of credit for a significant amount.
Lines of credit play to your advantage simply because the interest rates on them are exponentially less than that of a credit card. And they help with starting a business because often times you only have to service the interest on a monthly basis (no principal payment). So, when cash flow is minimal in the early stages of your launch, lines of credit keep costs low. They are a powerful tool for bootstrapping entrepreneurs willing to take on risk.
How to Get a Loan to Start a Business
The safer the bank feels about issuing you a line of credit, the better the interest rate and the bigger the loan. To make the bank comfortable with issuing you a $50k-$100k line of credit (enough to start a business), you need to be able to provide collateral on that line. This means you must save/invest, well in advance, and put that money into the right asset class.
Given that RSPs or 401(k)s can’t be used as collateral, they won’t help you get ahead as an entrepreneur the way other types of investments can. The same goes for stocks. Banks rarely, if ever, use stock portfolios as collateral given their perceived volatility.
So when saving, think collateral…
You need to save money by investing in assets that can be used as collateral against a line of credit to help fund your business early on. And there is no better asset to be used as collateral, at least from a banker’s perspective, than real estate.
Depending on your credit rating, and the type of property you own, banks will issue anywhere from 40% - 80% loan to value on a credit line against your property.
As such, it makes sense to dump as much of your savings into the house you own and live in, or an investment property, if you know you are going to need capital to start a business down the road…
Aggressively paying down the mortgage on an investment property or your personal residence not only builds your net worth, it gives you the opportunity to tap into leverage. Leverage allows you to pursue your entrepreneurial aspirations without having to raise capital via an equity stake in your company early on (the most expensive money is early investment).
The Power of Credit
If you’re aiming to launch a business one day, start planning now by saving like an entrepreneur. Put your savings into assets that can be used as collateral to springboard your venture. I’ve walked this walk and used inexpensive leverage to successfully start businesses in the past, and you can too.
Stay hungry,
Aaron
