The Art Of Borrowing Money In A Way That Makes The Lender GLAD They Lent It To You

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Note – this article deals primarily with “private” business transactions between individuals. Many of its principles are however applicable to all aspects and types of borrowing. This is general information; not professional financial advice nor a substitute for such.

The Art Of OPM

Utilizing OPM (Other People’s Money) effectively is truly an artform. The world’s biggest, most powerful and most successful businesses borrow money all the time! Hundreds of millions! So there’s no need for any negative feelings about borrowing. It is a fundamental way to do business. However, your reasons for borrowing, your control of the situation and your execution of all details must be correct. Borrowing for the wrong reasons or with poor execution is like pouring water into a bucket with a hole in it, pretty soon it is all gone, and then the creditor is after you. On the other hand, OPM handled correctly is a great way to get rich, to do business and to forge strong and powerful friendships and alliances.

It is for these reasons that it is very often advised not to loan money to friends, because you will lose both the money and the friend. I would agree – it is not at all advisable to loan money to friends. The reason being, that it is no longer a business deal but is done for emotional reasons, which replace business acumen and accountability. Just don’t do it. Gift them whatever you feel like giving them, and make it clear that it is a gift, not a loan.

There Is More Money Than There Are Things To Do With It

The next concept to understand is that there is truly no shortage of money. In money circles, it is a standard joke that there is more money than there are things to do with it… which is ironic because most people think that it is the other way round. But it is a fact – there really is more money than there are things to do with it! If you have a superb business plan, great track record and can demonstrate clearly why your idea will be a success, then of course you will find backers – because who doesn’t like making money? But it is like horse racing; people simply want to bet on the winning horse. There are plenty of betters and not enough winning horses… which is why we also have the old saying that banks will give you an umbrella when the sun is shining and snatch it away when it pours.

The third thing to remember is that you’ve always got to offer the investor a slice of the action. The deal needs to be worth doing, from their point of view. As that great strategist Machiavelli once pointed out – “Appeal to their self-interest, not to their sympathy.” Money people grow to resent those who are in constant need of bailouts – yet those very same money people will always be interested in turning their money into more money. You do not want to be asking for a favor. You want to be offering a genuine opportunity. That is your principal piece of leverage, right there.

Creating and managing trust

Deals can come in all shapes, sizes and types and you can create any kind of deal you want, so long as it is legal and works for all parties.

But whatever you do, get it in writing. All too often, the reason things go wrong is because of misunderstanding or miscommunication. Getting it in writing eliminates most of that as well as creating legal accountability.

Remember that creating trust is a skill, and it is also your responsibility. It takes a little maintenance, and you as the borrower are the one who should do it.

For example if you are borrowing the money, one of the worst things you can do is act defensive if the person lending the money starts to question or doubt – because that can make them start to get fearful and freak out. Do not be offended if someone doubts you. It is not an insult. It is most likely not even about you, just about their primal fear of losing their money!

If someone has king-sized doubt in you and no faith, then you should not borrow from them in the first place, as they will hound you and worse, maybe even try to control you or force your hand. This is important to remember – and you should know about someone’s track record as an investor, just as much as they should know about your track record as an investment. If someone is a “loose cannon”, has a controlling nature or if they are highly neurotic, avoid!

During a venture, be attentive. Call the person and let them know how things are progressing. Just the very fact that you called and showed attentiveness will generate some trust, it shows the person that you actually care (otherwise, how will they know??)

And if things aren’t happening as time approaches the due date, for sure talk to them before they inquire. Do not ever wait until the due date before announcing that you don’t have it, and even worse, by the time that they are calling you asking you “Well? Where is it?” Timeliness is critical. Communication is critical.

The other super thing about building trust is that it leads to bigger deals in the future. If you have proved that you keep your agreements, trust increases. Example, I was once able to go to a trusted friend and borrow $10,000 for one of my online businesses because I have already borrowed money several times from her in the past and have a perfect track record of paying back on time. I have also always been v careful to keep her “in the loop” as to how things are progressing. I have basically proven that I will pay back. I also offered interest, a “piece of the action” and she did it without hesitation. She gave me the check the same day! You could argue that my “personal credit score” with her is really good.

So for this reason it is always good to borrow only that which is within your means to pay back. It sounds like stating the obvious but this point is so very often ignored. Don’t “max out” on either the amount or the due date, and end up with a cliff-hanger finish, because even if you are well-intentioned, investors hate that stuff and it leads to reduced willingness in the future. And you should always be looking towards the future: The relationship is the real nest egg, not the money. So don’t give them anxiety! The very best way to get a big loan from someone is to prove yourself (ideally several times already over an extended time period) with a smaller loan first time round, and have all details handled professionally, smoothly and impeccably. This will build your “personal credit score” with that person and pave the way for bigger deals in the future. You want to be in a position where they cannot wait for your next venture, and where they want to be sure to be the first in line to get their money out! Even better, when you have a solid rep, money people will start scouting for deals for you also. Money people typically have an extended network of contacts with other money people – and are coming across deals all the time.

Your biggest investors – and easiest ones to get the money from – are going to be those with whom you have already done several pieces of good business.

If The Model Is Weak, No Amount Of Investment Will Make It Fly. If The Model Is Strong, Investors Will Flock

It’s a classic mistake – probably even the all-time classic mistake – to assume that all a business may require in order to become successful is to have cash thrown at it. It might sound obvious, but so many people fall into this trap. They keep pumping money into a project hoping to “inflate” it – but to no avail. They take their money (or their investors money!) and throw it at the business, only to find that the business simply chomps all the cash and then gets hungry again really fast. They may not even be aware of what’s really going on. They just think “More money. All it needs is more money, and I will blow this thing up.”

A business should produce money, not consume it!

Enterprises do require investment in order to succeed – and a development period which must somehow be funded. That is well known. However, it is not all that they need. This is very important.

If the business model is not sound, investment will not make it so. However, if the model is sound, investment will be likely to actualize the profit.

If you find yourself thinking that all your business needs is more money, it is possible that you are in fact not facing the real obstacle(s) you need to overcome in order to become profitable. Also, bear in mind that becoming profitable first is one of the very best ways to attract financing! Who doesn’t want to bet on the horse that is already winning? Fix the model first!

This is one of the key reasons to make a business plan. You don’t just make a business plan so that you can dazzle someone and get their money. If this is what you are thinking, might be best to start again. Make the business plan in order to penetrate deep into the mystery of whether a business will actually be profitable; in order to create a really good model. Don’t create a fudged plan to impress a potential investor. Create a real one in order to model and apprehend as well as possible for yourself the reality of the business you are attempting to create. And then, when you have as good a grip on the actual dynamics as you can, and ideally some form of prototype that demonstrates that you already have profitability, you will be able to move on much more powerfully to the next step of seeking investment.

Demonstrate profitability beforehand

Many people rush out to get funding before they have made a cent, and this comes both reluctantly and at a high price. However, if you can demonstrate that you are already making money, and that you are growing, it is a much more appealing prospect. So (if possible), it is often advisable to “bootstrap” (i.e. self-fund) the first phase so that you can demonstrate some actual profit or at least some solid progress towards that point.

When you pay back, ask the investor “Well, how was that for you? Are you happy with the way it all went? Will you be interested to do further business in the future and to entertain new propositions?”

The reason why this questioning is gold is that it shows that you understand the long-term mindset, and appreciate long term relationships. You have the intention to continue to transact successfully over an extended period, and to continue to make money for your partner for a long time. This itself will lead to a further increase of trust. If you are approaching it with that mentality “It is my intention to continue to make you lots of money for a very long time”, and then you back it up time and time again, well you will have your investor. You will be an investor’s darling protege, in fact.

Another tip – offer an unexpected bonus to your “angel investor”. Be like “Ok, here is your $10k. Here is the $1k interest as promised. And here is a $500 bonus. Things went extremely well and we wanted to say thank you so much for your goodwill and your good business.”

You might think $500 is a lot to hand over “for free” but think how much that $500 is worth when you want to go back for another round. Do you think they will pick up the phone? Hell yes!!! Even though they know damn well that you are calling for money. Especially because they know you are calling for money. They might even call you!!

And that is where you want to be.

Further reading: Series A, B, C Funding: How It Works

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