Financial planning · Startup finance

Should I take out a personal loan?

Emily Little Executive Assistant at VSA Partners

January 10th, 2016

With fair credit (due to student loan and light credit card debt), I foresee it being pretty difficult to get a small business loan for $250,000, which is what I will need if I want to start up my business. My business does not exist yet, however my business plan is 100%, I have all my quotes and contacts needed to launch successfully.
Of course there are options like Kickstarter and Indiegogo to start fundraising, but first I need to pay about $15-18,000 for legal/patent fees before I am able to publicly talk about my product.
If I take out a personal loan, I can pay off my credit card debt, pay for my legal fees and the remainder of my final prototyping fees.
I'm concerned about having a higher interest rate with a personal loan, and a pretty high monthly payment which will cause me to be pretty tight on money.
This product I have created is my passion, my baby, I have 100% confidence in this. My only fear is financials.
I've had this idea for about 5 years now, and I've let my fear of financials get in the way.
I am ready to dive in head first, but I don't want to screw myself and my business financially before I've even started.
What kind of advice can you offer for me to get the ball rolling?
Thank you!

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MaxBlox/Founder Institute Director, Chennai Area at The Founder Institute

January 10th, 2016

Starting out in the hole on day one is a very bad way to start a business. Some businesses have no choice except to do that. But most don't have to.
The idea itself is less than 1% of the likelihood of your success. Almost 99% of your success is going to be how well you are going to execute.
Budgeting $18k for patenting is largely a waste of time. If your idea is really good, someone can figure out a variation of your idea that is not covered by your patent. And you really won't have the money to prosecute even if you prove violation of patent.
Plus there are very few unique ideas. Almost every business has multiple competitors even when they have patents. How would that be possible if patents really were that effective.
Focus on the execution. Figure out how to start your idea with maybe just $10k. Study methodologies for startup such as "Lean Startup" or join accelerators such as "Founder Institute".
By reducing this mountain in front of you you are more likely to not wait for another five years.

Michael Feder Founder and CEO at PrayerSpark; Finalist: Global Business & Interfaith Peace Award

January 10th, 2016

Hello Emily, The part of your ask that I find a little troubling is the money you want to spend for legal fees for patents. Patents may be the right way to go- but the cost of enforcing a patent is very high. Not sure what you have, but execution is much more important than tying yourself up in legal IP litigation for years. Perhaps a trademark or other legal protections- less expensive and easier to enforce- may be the better way to go. You should be able to spend under $500 on LegalZoom creating your LLC, get your Tax ID number free, and open you company bank account for free. If you are very paranoid during the build, you can ask everyone involved to sign an NDA. But just remember, patents are expensive, and very very expensive to enforce. Hundreds of thousands. And attorneys, most typically, won't do this on contingency... Best, Michael (Michael@PrayerSpark.com) This email has been sent from a virus-free computer protected by Avast. www.avast.com <#DDB4FAA8-2DD7-40BB-A1B8-4E2AA1F9FDF2>

Faisal Memon iOS Department Technical Lead at Citrix ShareFile Quick Edit

January 10th, 2016

I agree with Shobit, there are some red flags here that merit caution.

Firstly, you have not socialised the idea.  That is, internally you know its good.  I had the same feeling in the past.  When I actually shared it, I got a luke warm reception, and when I shared in in a relevant forum more focussed, I had flaws pointed out that basically saved me 2 years wasted time/money.  There is nothing in your brief message that references others being on board with it.

Secondly the issue of patents.  Provisionally filing a patent is really cheap.  In the UK, the british library helps out people wanting to do so.  But its a total distraction.  I have been heavily involved in patent litigation in the past, from helping prepare a case, being 'deposed', attending court as an expert witness, etc. [Nokia N8 versus Apple iPhone case(s) at the ITC, Washington DC].  Having one or say 10 patents is irrelevant because you defend areas not point issues, so you need about 500 patents in hand so when you litigate you do run say 25 in flight at a time during court proceedings.

My advice is first tell your friends and family about your idea.  Stress test it with them.  If all ok, talk about it in the specialist forum that is relevant to your idea.  Assess the feedback yourself and with someone you trust.

If all is well, test the market by offering people to buy the product or service off spec - but they only get charged in 12 months when its launched.

If that goes well, think about financing options for a mini version of your idea.  At this point take on some advisors who give advice for the journey for 0.5 % equity.  Relevant options all depend on the kind of idea and business so can't be specific here - that's where advisors help out.

Tuning your idea/product/service based upon true customers who are getting the early bird chance to try you out are the true north compass.  Good luck on the journey!

Tim Kilroy Analytics - LTV - Boosting Profits - Digital Marketing

January 10th, 2016

Unless you have significant collateral (property, inventory, etc) you aren't going to get a $250K loan from a bank without an active business (they don't lend against a biz plan - only cash flow and revenue). You need to figure out how to generate revenue or seek investment before product launch. (You can probably figure our a provisional patent filing to keep yourself safe for less than $18K). Nobody will lend against your potential - only your success.

If you CAN get a $250K loan, then rock on - that is a great way to keep equity until it becomes a currency that is worth something.

Michael Brill Technology startup exec focused on AI-driven products

January 10th, 2016

I think you're asking about whether you should borrow $18K to move your idea to the point where you can do a kickstarter or attempt to raise money. And ultimately that's about your runway. $18K @ 8% for 60 months ~ $400/month. Let's say your current credit card payments are $100/month, that leaves you with $300/month. Can you afford to pay $300/month for the next 5 years if this doesn't work? 

Perhaps a better approach is to try to raise $20K on the basic idea from F&F. If you don't feel strong enough about the opportunity to risk this, then that should tell you something about your readiness. 

You either take the personal financial risk or get others to do it. Generally, it's better to do the latter.
 

JD Ryan Downunder Toys Pty Ltd

January 10th, 2016

Great advice here, Emily. From my experience, the important thing for you to consider is the timing. You believe in your business plan, and it may well be successful, but will it, even in best case scenario, start generating cash in order to pay off the loan when the payments start to fall due? I have tried this path and failed - the successful path has been finding investment from Angels. They give you have the chance to get your business up and running in order to return on the investment, not to meet scheduled repayments.
Also, Michael is absolutely right about the legal work...Patents can be a colossal waste of money unless you have deep pockets to defend it. You could get a provisional patent application for the price of the USPTO fee just to secure the prior art provision. This will give you one year in which to secure funding before having to pay high fees for the full patent. I did my homework on this and wrote my own provisional patent application which was consistent with the descriptors and clauses of others in my field.
Best of luck with your business.

Akram Benmbarek Building & Growing innovative businesses

January 10th, 2016

Emily - If you think you need $ 15K - $18K for legal fees to protect your idea, you're starting on the wrong foot. Save your money to go through the customer development process and validate your idea. Protecting it will cost you less than $ 500 the first year through a provisional patent. Then you have one year to make sure the idea is good, somebody is willing to buy what you're selling, and maybe you're able to finance it. Good luck.

Emily Little Executive Assistant at VSA Partners

January 10th, 2016

Wow guys, all of this is great info, I am so glad I reached out! This has really helped to change my patterns of thinking, its so easy to get caught up when you are starting out on your own. 

Tim:  You are so right. I'm definitely not getting any kind of small business loan at this point in the game. Getting the product out there is the most important. I will definitely change up the plan and look into more reasonable options for a patent filing. 

Aaron: Thank you for this advice! I am currently working on a pitch deck, and that will be one of the first things I do once my IP is safe and protected. 

Shobhit: Thank you for this recommendation, I will definitely check it out! Once I am able to share my product and start building my brand, there are many options to look into.
I can see how these statements can be concerning, however, I know my customer, and my product serves a purpose. It fixes a problem, and fills a void in the industry. Also, I understand that no one will be as passionate about my product as me. I believe that passion is essential in order for an entrepreneur to be successful. 

Michael B: You hit the nail on the head. I am going to have to put something into this to get started. And yes, there are many options like the ones listed above that I can implement into my plan. Ready to take the risk and move forward! 

Michael F: You are right. These numbers are what I have been quoted from one person. After reaching out, I'm learning that there way more reasonable ways to go about this. I will be using LegalZoom for my LLC, and also have a NDA on file for use in these situations. 

Gopi: Great advice. I am going to start reworking my plan of attack and get these costs down. I will definitely look into these recommendations! 

JD: Yes, everyone has given me a brand new perspective. Its so nice to have a community like this. It's time to put myself out there and see what I am capable of! 


A HUGE Thank you to everyone who gave your thoughts and recommendations! Thanks to all of your advice, I have a lot of direction to move forward. Follow me for updates, or reach out and send me a message! 

Andrew Lockley

January 10th, 2016

Assume the business will fail (most do). Then consider the wisdom of the loan

Shobhit Verma

January 10th, 2016

Use this company to file for a provisional cheaply -
Govind Kedia ( http://www.arcticinvent.com/ )

Then talk to as many people as you can, build a non-working visual prototype of the user experience and get feedback before you pay anyone for building your dream.
Kickstarter/Indiegogo is a great idea to test out the product market fit.
You have used a few phrases in your story that makes me a little worried. I do not know anything about your idea so hopefully I am wrong but please venture in as lean way as possible.
"I have all my quotes and contacts needed to launch successfully."
"This product I have created is my passion, my baby, I have 100% confidence in this. My only fear is financials."

Confidence is great, unless it starts coming in the way of listening to actual users/customers. I have made some mistakes and hopefully you don't!
Good luck!