The first step in starting your own consulting engineering practice is to do a detailed Business Plan including a “Cash Flow Analysis” identifying your first year funding needs. There are two types of funding; Equity & Debt.
This is what you and your partners have saved and are willing to invest in the business. Lenders will expect at least 30% of your first year funding needs to be “equity” funded.
This is borrowed money that must be paid back. Normally, the principal and interest is paid back in fixed monthly payments. Be sure that you have estimated these payments in your “Cash Flow Analysis.”
EQUITY FUNDING INCLUDES:
Don’t overlook the obvious: parents, in-laws, and close relatives. They are often willing and able to fund a professional practice that is intended to support you and your family into retirement. There should not be a written obligation to repay these funds or it will be considered “debt” funding.
Besides passbook savings accounts, “savings” include CDs, stocks, and bonds. Avoid the temptation to cash these in and deposit the proceeds into your business accounts. In most cases, there is little hassle in borrowing the cash value without the lending institution requiring your accounts as collateral.
Homeowner Second Mortgage
I realize that the term “second mortgage” will be scary to both you and your spouse. But your home equity is probably the largest portion of your net worth. In the worst case (your business fails), this gives you long-term, low interest financing of your obligation. Depending on mortgage interest rates, it may be better to refinance your home mortgage.
A big advantage of funding your new engineering practice through a mortgage is tax deductibility of interest.
I don’t recommend this option, but some businesses are funded by credit card debt. Avoid this if at all possible.
Venture Capitalists, Silent Partners & Angel Investors
If you are a medium or large start-up, you might attract funds from these sources. However, they will expect a share of equity in your company. Often, they are not paid back on a regular schedule, but they are paid upon the sale of your company. If you are in it for the long haul, this is probably not a good choice. If you are a small start-up, venture capitalists are unlikely to be interested. Also, they are not very “silent” if they disagree with management decisions. Also, some states forbid ownership in A&E firms by those who are not members of the profession.
Crowdfunding has its origins in the concept of crowdsourcing, which is the broader concept of an individual reaching a goal by receiving and leveraging small contributions from many parties.
Crowdfunding models include the people or organizations that propose the ideas and/or projects to be funded, the crowd of people who support the proposals, and the funding portal.
This method of equity funding is too new for me to properly evaluate at the time of this writing. However, it may be worth investigating.
Excerpted from The “Complete Guide” to CONSULTING ENGINEERING © 2015 John D. Gaskell. Used with permission of Professional Value Books, Inc. All rights reserved. Order at http://www.TheEngineersResource.com. Use discount code “paperback” and save.