Work & Finance

Follow Your Dream

Got a brilliant idea, but can't afford to launch your own business? Whether it's a high-tech start-up or a corner bar and grill, here's how to bankroll a business without risking it all.

Where most guys would see a receding hairline, Todd Greene saw dollar signs. A 30-year-old Web designer working for GeoCities in Los Angeles, Greene's answer to hair loss was to shave it all off. But he found that conventional razors were hard to use on the top of his head. So at night, after work, Greene designed an exotic new device he dubbed the HeadBlade. He spent two years perfecting the Zamboni-like contraption, which comes complete with a tiny wheel and suspension. It kept his pate shiny, so he started looking for a deep-pocketed partner who was willing to put up the money to mass-produce his invention. Gillette and Schick swatted him away. Venture capitalists, fixated on finding the next Yahoo!, laughed in his face.

Greene could have given up there, as do many wannabe entrepreneurs. Instead, he scrounged up just enough cash from his father, two friends, and his own savings to manufacture 500 HeadBlades. He quit his job, strolled down to Venice Beach, and sold them out of his backpack. They went quickly. Ten years later, HeadBlades are on the shelves at Wal-Mart and CVS.

About 40 percent of Americans are self-employed at some point in their lives, says Scott Shane, PhD, author of The Illusions of Entrepreneurship. They're not aping Bill Gates—they just want to fire their bosses and earn a decent living, whether it's running a bed-and-breakfast or opening a fly-fishing shop. But most don't make it very far, and the reason is usually money. Lack of money. How do you score the cash you'll need to stay around for another day? For most people, it means putting some skin in the game. Maybe you won't have to quit your day job (at least not at first), but you will have to pull off some of the kamikaze stunts that come naturally to born entrepreneurs, like stealing from your retirement savings or hawking a product you haven't invented yet. The good news is that if you have the cojones to pull off such moves, there are lots of ways to conjure start-up resources…things most guys never think of doing. Here are a few of the most effective ones:

RESOURCE 1: Yourself  
Tony Karklins earned just $29,000 a year as a bike-store manager in Little Rock, Arkansas, but that didn't stop him from pursuing his dream of bringing Euro craftsmanship to Yankee cyclists. One morning about eight years ago, he pulled up to the local bank in his Saab convertible and offered it as collateral for a loan. He took the $3,700 grubstake and wired it to a company in Spain, which sent him 10 exquisite bike frames in return. Within three months, Karklins had paid off the loan (with 8 percent interest), and within three years, his fledgling distributorship had made the Spanish company Orbea the largest-selling European road bicycle brand in America. "I couldn't find a visionary, so the best thing I could do was hawk my car," says Karklins.

Waiting around for that deep-pocketed visionary may be the biggest mistake made by first-time entrepreneurs. With all the ink spilled over highfliers such as Facebook and YouTube, you might think venture-capital firms are the main source of money for new businesses. But only a few hundred firms—mostly high-tech outfits—get VC money each year. The biggest source of start-up capital by far is the founder's own savings, says Shane, who has crunched the federal data on small-business funding. The next-biggest source is the bank, but we're not talking about conventional business loans. Banks claim to love the little guy, but they rarely pony up for start-ups without some kind of personal guarantee by the borrower. More often, the entrepreneur takes out a home-equity line and funds his business with the proceeds. It's a good option because of the relatively low interest rates (currently below 6 percent). If you don't have a lot of home equity, an unsecured loan—backed by your personal credit—may be good for a few thousand bucks, but you'll pay rates north of 9 percent.

Still can't raise the money you need? Time to get creative. In rough order of recklessness (least to most): Sell that Saab convertible and buy an old beater. Cash out your vacation days. Borrow from your life-insurance policy. Max out your credit cards. Borrow against your 401(k). This is how successful entrepreneurs roll, and big-time investors will expect it as a sign of commitment. "We look for entrepreneurs who have invested as much personal wealth as feasible in the company," says William Payne, a San Diego–based "angel" investor who has poured more than $2 million into start-ups. "If he hasn't, I ask him, 'Why should I invest in your company when you haven't?'"

If all this makes you queasy, look at the bright side: You might not need as much cash as you think. The average business costs just $25,000 to launch, says Shane.