Do you need money for the next phase of growth for your business?  Conventional wisdom recommends you borrow from a bank. While that may be convenient, the risks and costs can be significant. You often must pledge personal assets – like your home – as collateral. 

           As Christians, we are mindful of the Biblical teaching on borrowing. There are multiple passages of scripture that provide us guidance on this issue.

           For example:  Proverbs 22:7 New English Translation

“7 The rich rule over the poor, and the borrower is servant to the lender. “

           Nehemiah 5:3-5 New English Translation

           3 There were others who said, “We are putting up our fields, our vineyards, and our houses as collateral in order to obtain grain during the famine.” 4 Then there were those who said, “We have borrowed money to pay our taxes to the king on our fields and our vineyards. 5 And now, though we share the same flesh and blood as our fellow

countrymen, and our children are just like their children, still we have found it necessary to subject our sons and daughters to slavery. Some of our daughters have been subjected to slavery, while we are powerless to help, since our fields and vineyards now belong to other people.”

           We understand that when we borrow, we are now in a ‘servant’ relationship with the vendor.  We have reduced our freedom and have created an obligation.  That obligation may come back later to cause all kinds of adversity. 

           If you need other people’s money for your business, take the time to consider these alternate approaches to raising money.

           1.  Create a limited partnership. 

           A limited partnership is a business structure with at least one general partner and one or more limited partners. As the General Partner you would be responsible for managing the business, while limited partners invest in the project, but do not participate in daily management and are only liable for their initial investment.

           The partners buy into a deal and receive a share of the proceeds as well as the tax losses.  If there are no proceeds, then the partners lose their investments with no burden on the borrower to pay them back.

           If you can segregate some aspect of your business, you can spin it off as a separate entity and fund it through a limited partnership. This can be easily done with forms downloaded from the web. 

           Here’s an example.  When I wrote my first book, I elected to self-publish it and offer it to a specific niche market. In those days, self-publishing was a major effort, involving designers, editors, printers, etc. and costing around $20,000.  Rather than borrow the money, I elected to form a limited partnership to fund the publishing and promotion of the book.

           I went to my clients, and formed a group of four.  My company would be the general partner, responsible for publishing and marketing the book, and the four investors would receive 50% of the profits until they got twice their investment returned.

           I sent a quarterly statement to the investors with a check.  There were no meetings involved and they had no say in how the book was published or marketed.

           I was able to publish the book without any personal liability.  They eventually received twice their investment back — a win/win for everyone.  When they received their final payout, we closed the partnership and the general partner took over the ownership of the book.

2. Sign a Royalty Agreement

           If you watch Shark Tank, you’ll recognize that this is the kind of deal that Mr. Wonderful does on Shark Tank.  He offers X dollars in return for a royalty of a certain amount for every product sold.  If the products don’t sell, the investor is out his/her investment with no burden on the borrower to pay him/her back.

           This aligns the investor’s interests with yours, as you both want the same thing – increased sales.  The degree to which the investor is involved in the decisions about the product can be negotiated and entered into the agreement. There is no liability on your part other than to make the requisite royalty payments.

           As this is a contract, the terms need to be negotiated carefully – the royalty amount, the term of the agreement, etc.  Typically, you’ll pay more than a bank loan, but will have not have the personal liability of a bank loan

           In addition to the money, this arrangement may be used to bring some expert help into the business (although it is not necessary) on a percentage, rather than on a salary basis.          

           This works well when you have an individual (or corporation) in your sphere of influence who is able to invest and is interested in the terms. 

3.  Borrow from your customers.

           Of all the possible sources of other people’s money, I like this the best.  Your customers know you and your products.  If they feel comfortable risking their money with you, in whatever format or structure you develop, it is a solid vote of confidence in you and your business.  

           You can use either of the two mechanisms I mentioned above, or create a simple loan. This is what I did to fund the limited partnership described above.

           Additionally, it binds your customers closer to you, creates a greater degree of transparency and trust, deepens the relationship, and makes it easier for them to remain your customers. 

           If you can arrange with multiple customers at a smaller amount each, you spread the wealth and reduce the risk to them and you.  If the deal goes bad, hopefully, you still have the customer relationships.

           These three alternate approaches take a bit of creativity.  But they relieve you of the personal liability,  don’t require your home as collateral, and spread the wealth.  They are, therefore, more aligned with Biblical guidance.