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F E E L A T H O M E www.azindiatimes.com PAGE - 21 May 2019 1-844-AZINDIA How to Fund Your First Business? By Sat Parashar, PhD parashar.sat@gmail.com In the January 2019 Issue of AZIndia Times, we discussed Why Do Business? February Issue discussed Which Business Should You Go For? Should You Buy An Existing Business, Franchise Or Build From Scratch? In March Issue, we discussed Where To Locate Your Busi- ness? and How To Value A Business? was discussed in the April Issue. Let’s now discuss How To Fund Your First Business (The Biggest Stopper)? I am sure many of us at some point in our lives have come across moments when we thought of going into business, but couldn’t go because money stopped. The questions were: where to have money? Will I take a risk with my hard earned sav- ings? What if business fails and I lose all my savings? If you have faced similar questions, you may continue reading further down here. Real Stoppers If you go over the above ques- tions, one more time, search- ing for real stoppers, you will notice three scary words, namely, risk, failure and loss. The biggest stopper of human endeavor has been fear of failure and loss. Risk gener- ates that fear. But that is the downside of risk. There is also an upside of risk. The upside is that risk-taking opens up new opportunities and poten- tials of generating profit and wealth. Let’s understand risk, a bit more. Risk is the possible loss. Risk is thus a function of probability of loss and ‘amount at risk’. If you buy a lottery for one dollar; probability of loss is almost 99.99% and ‘amount at risk’ is one dollar; so the ‘value at risk’ is (.9999 x1), that is, almost full amount at risk of one dollar. Lesson: If probability of loss could be reduced, value at risk will be smaller than amount at risk. Also if amount at risk is reduced, the value at risk will be reduced. Good news is value at risk, in business, tends to be smaller than amount at risk. I am certain none of us has ever seen any one crying or committing suicide for not winning a dollar lottery. Here is an important lesson: it is not risk per se, it is your risk taking capacity or what is also known as risk appetite that really counts. This is also true in business. The Way Out Risk in inherent in every business as it involves unknown and unforeseen future. The way out is not to shun it completely. The way out is to mitigate or reduce risk to match it to your risk taking capacity. Risk sharing and risk transferring are the two great strategies of risk mitigation. Risk sharing is sharing risk with like-minded others. One of the finest innovation that human being made for risk sharing has been the joint stock form of business, where shareholders share risk, with a defined upper limit. Another all-time favorite structure for risk sharing has been the business part- nerships. Interestingly, there are even lottery clubs. Lottery Club is a group of people who combine their money to play lottery. Most businesses started out as partnerships. It may be partnership with your family, friends and colleagues, that is the easiest of all sources for funds for your first business. Today there are many others to partner with like, angel investors, venture capital- ists, and even general members of public, what is popularly known as crowdfunding. Risk sharing essen- tially does not obligate contractual return and repayments. Lenders and insurers are other sources. But remember, they don’t share risk; they help risk transfer. They take a portion of your risk for a contractual return. Risk trans- ferring obligates contractual re- turn and repayment. Insurers charge you premium upfront. Governments also sometime provide grants to set up new businesses, In USA, you may visit Small Business Administration (SBA) website to learn about various funding programs available. Finally In my opinion, for funding your first business, your own savings and funds pro- vided by your family, friends and colleagues are the best source. For scaling up your business, everyone else may be approached. Funds from family, friends and colleagues are best source because those save you underwriting time and costs. As obvious, those funds tend to be limited. This source is thus good for funding low capital investment businesses. It is also advisable that funds from family, friends and colleagues may be taken as bullet loan. Bullet loan is like interest only loan. The repayment of principal is deferred. It would also save income tax as interest on business loans is tax deductible. Sat Parashar is former Director, IIM Indore, India, currently based in Glen- dale, AZ. He teaches at Rady School of Management, University of California, San Diego, CA. He also advises on real estate and life insurance.