In light of highly public cases involving financial advisors disappearing with client money, multiple articles have been written recently on conducting proper due diligence in hiring a financial advisor. Many of the articles start at the same first principles: hire a financial advisor who have accredited designations issued by regulatory bodies.  While I do not dismiss this step by any means, there is a structural issue that limits a reliance upon designations as an effective shield against hiring a bad advisor.

Most professionals in North America (lawyers, doctors, accountants, finanacial advisors) are self-regulated. This means, in essence, the members police ourselves; the alternative is to allow the Courts or some other tribunal compromised of non-members to regulate a profession. What most members of the media and public don’t know is that it takes years before a member is disciplined with full public disclosure.

Why?

Some of it has to do with simple bureaucracy, some of it with due process and some of it has to do with the need to self-perpetuate the profession. My colleague, who once sat on the disciplinary committee of the Law Society of Upper Canada (the body that regulates Ontario lawyers), once told me that the Law Society of Upper Canada gets upwards of 100 complaints a day. Most are considered by staff to be frivolous, some are investigated and no further action is taken once a lawyer responds and, probably 1-2%  do require some disciplinary action.

But the typical process does require that the lawyer and client attempt to work out the issue themselves first before coming back to the regulators. If a breach of the rules of professional conduct is alleged and there may be grounds for such allegations, a thorough investigation has to be conducted with a presumption of innocence (but, in the legal profession, the lawyer bearing the burden of showing he/she acted within the rules). If the investigation finds there is some breach of the rules, typically,  a proceeding has to be initiated, a disciplinary board struck, a hearing heard and then a decision delivered and a right of appeal granted.

This process can literally take years. As I stated before, 98-99% of the complaints do not have sufficient grounds to proceed past either “no action required” or a questioning of the lawyer with a satisfactory answer. In the 1-2% of cases where some action is warranted, the lawyer can continue to practice until a decision is rendered (although, in some cases, with restrictions).

I am going to suspect the bodies that regulate the various financial advisory designations work in a similar manner. I am also going to assume that 98-99% of advisors work within their rules (performance and acting ethically are two different issues) and that the Madoff’s of the world are exceptions rather than rules (which is why they make the news, the media does not report on the ordinary, only the extraordinary).

This means, in a worst case scenario, an advisor who is eventually found crooked could continue to add more clients during the time he/she is under investigation (unless they are a terrible crooks and their crimes are easily discoverable). In other words, there is a time period where the public continues to be exposed while the regulators investigate (and fraud is a difficult thing to find).

The credit-crisis also highlighted the down-side of self-regulatory bodies. The regulators are being paid by the same people they are policing. If you bite the hand that feeds you too much, suddenly, you are not being fed much anymore (most securities regulators are paid filing fees for every document filed). Everyone knows who butters their bread and respond, unconsciously or not, accordingly.

Thus, a poor run regulator prosecutes the obvious injustices but takes it easy on the grey areas. Practically speaking, poorly run regulators kowtow to the larger players in the market since they pay the most fees and have the most political power.

It is, by no means, a perfect system but we do not live in a perfect world. However,  my point being that a simple fall back to “hire an advisor who is regulated with some body” as a perfect shield against bad advisors is too simplistic (this argument is under-cut even greater since, starting Sept. 28, all persons who sell securities in Canada, regardless of province, will have to be registered with securities regulators under a designated class under National Instrument 31-103).

What I would suggest is to build on the designation and add the following:

1. Hire through word of mouth.  Most of the great advisors I know (and there are many out there) rarely advertise and are not with big shops. They are in niche shops (think the Jerry Maguire mission statement: less clients, more service) and build their books through word of mouth. The key is to ask how may bear markets the referral source has been through with the advisor. Remember to judge people when times are bad.
2. Ask to interview their clients. Professionals don’t like telling you this but they niche (it is good business sense). I have met advisors who love clients that trade or only want clients that buy mutual funds. If you interview their clients and ask about what the advisor recommended, you get a better favor of their working style than any beauty contest can yield.
3. Really interview them as people. Do they appear grounded? What do they do on the weekends? What do they want out of life? Do they have expensive hobbies? Its like dating- ask enough questions and you may get back some scary answers. How one lives their lives comes through in their practice style.
4. Ask them to build you a hypothetical portfolio. If you see a lot of products you don’t understand, it is not a good sign.
5. Taste test. Give them only a part of your portfolio and tell them that. Give your advisor targets to aim before you move more assets over. Keep them hungry.

School can be an expensive endeavor.  Tuition, books, room, food, spending money- it all adds up. What are some ways to save money if you are sending your kids away to school?

1. Budget

Have a very candid conversation before you send your kids to school on what you are willing to spend. Stick to it.  It will teach your child to live within your/their means if you stay disciplined on a budget and it will be a good life-learning lesson on personal finance. Better yet, have the both of you sit down and prepare a budget together. If there is a shortage in the budget, your child can always look for part-time work to make up the short-fall.

2. Think  prepaid

Instead of giving your kids a conventional credit card to spend at university or college, think about providing a prepaid credit card instead. Prepaid credit cards are like debit cards in that a certain amount of money are stored on the card and when the prepaid credit card runs out of cash it can no longer be used without it being topped up with more money (paid link).

Prepaid credit cards also avoid the issue of high interest rates and teaches someone to budget properly.

Similarly, instead of arming a child with a conventional cell phone, think prepaid cell phones. The concept is the same as the prepaid credit card. You preload a certain amount of time on the phone and once it is used up, the cell phone cannot be used without topping up more minutes; it will teach your children that nothing is free in life. Best of all, most prepaid cell phone carriers do not require you to sign a long term contract.

The issue with conventional cell phones is that roaming, SMS charges, long distance charges do add up (you may be better off buying a  long distance phone card if you are sending your kids away from home rather than get a long distance plan on a conventional phone).

3. Think second-hand

I used to like buying second-hand books simply because someone highlighted all the important sections for me! Text books also go out of date very quickly (how else is a professor to make side income then to put out new editions every few years) so there is no real value in buying new.

Refurnished computers are also a good bargain (and, really, a new computer with massive amounts of memory will be used to download music and movies and not for school-work).

4. It is a dorm room, not a hotel

My regular columnist, Mom2KG, gave me this tip (who, incidentally, I went to school with so I witnessed this first-hand when we went to school). Every orientation week, vendors attempt to rent/sell mini-fridges to people. These tend to be used for nothing more than storing booze, water and more booze. They tend to be luxuries more than anything else so skip the bells and whistles.

Also avoid buying a lot of items for the dorm room (lamps, posters, book shelves etc. ) at the university book store. They tend to be more expensive. One is better off making a Costco or Ikea run beforehand.

5. Do not forget free money

There’s a lot of grants, bursaries and scholarships that most people don’t apply to. People tend to focus on the large entrance scholarships and forget the smaller grants, bursaries and scholarships. Most universities are dying to give this money away. Encourage your child to apply early and apply often. In my last year of law school, they were dying to give money away. I remember people who could afford to cover their own way were still receiving bursaries because the University had to give it away.

The economy appears to be in an illusionary state of normalcy. The norm of ever increasing real estate values and cheap credit has been replaced with the norm of ever-ending government bailouts and stimulus. At some point, the capacity of governments, both political and economical, to keep pumping money into the economy will reach an end point.  Assuming everything goes right and the private sector picks up where the public sector ends, will we see normal soon?

Based on history, the answer appears to be not for a long time.  As a prelude to the release of their World Economic Outlook, the International Monetary Fund looked at economic recoveries after 88 banking crises over the past 40 years in various countries and found: “the conclusion is that, on average, output does not go back to its old trend path, but remains permanently below it… the possible good news is that the trend appears to  be unaffected: on average, crisis permanently decrease the level of output, but not its growth rate.”

In plain English, the economy may not reach the same level of output again in some countries but growth rates tend to revert to the mean- but starting from a much lower base. This means that for some industries and businesses the infrastructure built to handle capacity circa 2006 may never be used fully (see auto plants), meaning job growth will be slow as industries may not need a full complement of employees.

As I wrote before, this may explain a slow drop in the unemployment rates (think years and not quarters) based on previous recessions and an investing strategy not premised on the assumption that things will get back to normal soon.

File this post under “obscure personal finance reading”  or “why dividend stocks continue to be your best bet.” A Swedish undergraduate research paper written earlier this year posed the question of what quantitative measures an investor should look at in determining which stocks will outperform the market in the 12 months after the end of the recession (…and to think I spent 90% of my undergrad on women, drugs and booze and the other 10% of the time I wasted…).

Using a very small sample size of the stock market recovery in the Swedish OMX exchange in the 12 months after the dot com bust, the researchers attempted to look at factors such as price to book ratio, price to earnings ratios, enterprise value/EBIT, debt levels and dividend yields and applied these financial ratios and factors to the study group to determine if tracking any one ratio would give an investor insight into which stocks would out-perform the market in the preliminary stages of a recovery.

The findings came down to three factors which they stressed should not be read together:

1. 12 month trailing performance. The worst the stock performed prior to the market hitting bottom, the more likely it would outperform the market during the recovery period.
2. High dividend yield stocks. Stocks that paid high dividend yields during the downturn tend to out-perform the market during the recovery.
3. Price to earnings ratio. Low p/e stocks tend to do better in recoveries but is a factor with less weight than the other two.

The sample size and study group are far too small to draw any definitive conclusions but the above does make sense. Given that poor performing stocks, which one assumes have lower p/e ratios than their peers with healthier balance sheets, tend to a longer ways to go to recover than stocks that went sideways during the downturn. Thus, when the recovery starts, the relative and absolute bounce is greater than their industry peers.

As for dividends, the paper did not address what a “high” dividend yield was or how high was too high. But, similarly, their findings do make sense. A dividend yielding stock that can maintain its dividend during downturns shows the market that it has its house fundamentally in order and, assuming that investors are more cautious in the embryonic stages of a recovery, there may be an initial overweight towards safer dividend paying stock when cash goes back into equities.

Applied against the run-up since March, what are we to make of all of this? Certainly, low p/e stocks in financial services and oil/gas have made a recovery, returning most of the paper losses for those who hung on. The dividend paying stalwarts of the market also seemed to have held on and done quite well since March.

But, with the S & P 500 p/e ratio at approximately 18, have we already peaked on the stock market recovery?  The stocks that under-performed may have already risen if the S & P p/e is approaching 20 and there may not too much more upside. Contextually, historical p/e is in the mid-teens and a p/e at 20 has never been sustainable for long periods of time.  Predicating the future is a mug’s game but food for thought.

The entire paper on stock market research is certainly very interesting and quite an accomplishment for an undergrad paper.

Scotiabank became the second Canadian bank, after RBC, to begin selling insurance by building insurance retail operations next to their existing bank branches. The rather strange result of having adjoining retail frontage operated by the same business, but selling different products, is a means to circumvent rule not allowing banks to sell insurance out of existing bank branches.

Is this growing trend a good thing for the consumer, the shareholder and the economy as a whole?

THE CONSUMER

On the retail front, we have all heard about financial institutions wanting to capture all of our business as your “one stop” cradle to grave financial services shop. However, anecdotal evidence  suggests that customer loyalty at banks really does not pay and is there any evidence to show that the retail consumer benefits from pricing power from banking, borrowing, trading securities or buying insurance from one shop?

Granted, there are small discounts if you buy different types of product offerings under one umbrella (State Farm Insurance is known to give a discount but you have to move all your insurance to them) but why give up leverage of moving around from financial institution to financial institution if there is no corresponding monetary benefit to shopping under one roof?

More concerning, the dirty little secret of insurance sold by banks is that banks are actually selling other insurer’s products or white-labeled products. Scotiabank will be selling Sunlife products. My insurance broker once told me that, at that time, RBC insurance products were white-labeled Manulife policies. If the banks are acting as distribution channels for insurers, obviously, there are costs of sales and their margins to consider. For a business with such large over-heads as banks, the cost could be great and they will be downloaded to the consumer.

But, to defend the banks for a minute, this may also be a good move if, and only if, this starts a price war. Banks have been selling insurance for years but if they move in scale, this may trigger price movement downwards. The key, as a smart consumer, is to obtain multiple insurance quotes from the banks, insurance brokers, on-line insurance quotes using the same assumptions and determine if different distribution channels have different price structures. If they don’t, I would still purchase insurance from someone other than the banks to avoid giving up all your leverage as a consumer; rarely is the lazy consumer, the smart one.

THE SHAREHOLDER

Increasing revenue sources means increasing revenue which, hopefully, means increased earnings. However, if the banks engage in a pricing war with the insurance companies (assuming the banks underwrite their own products) and vice versa (remember that some insurance companies are beginning to build out their banking divisions as well), what’s good for the consumer is bad for the shareholder. The recent supermarket price wars are a good example of happy consumers and unhappy shareholders.

On the downside, insurance is also a tricky risk management product. Actuarial calculations on probability of payout are really educated guesses into the future. Already juggling fallout from the credit crisis, if a bank dramatically increases its insurance exposure, it may have to build greater capital ratios (both for deposits and insurance exposure) which is a drag on earnings. Once again, the question becomes how well can a bank manage risk?

THE ECONOMY

There’s a rather deafening silence in the dialogue about financial services reform- the reinstitution of the Glass-Steagall Act. This Act, passed at the height of the Great Depression in the U.S., separated banks, investment banks and insurance companies from owning one another. One justification was that traders should be barred from using bank deposits to trade; banks are supposed to limit risk on deposits and they should not allow traders to have access to deposits given their relatively riskier functionality.

The act was repealed in 1999 under intense lobbying by financial institutions. Citigroup was the most well-known institution to consolidate deposit-taking, trading and insurance functions under one financial services holding company after the repeal of the act. Citigroup also became the poster-child for the credit crisis as its large derivatives exposure and imprudent trading practices put depositers’ money at risk.

Many countries continue to prohibit the consolidation of banking and investment trading functions. The U.S. sits on the other extreme of non-regulation. Canada occupies the grey zone. A financial institution can do a bit of everything- as long as its not under the same roof (a rule only a bureaucrat could convincedly think would work in real life).

If banks become insurance juggernauts, are we exposing our deposits and insurance premiums again to traders with much higher risk tolerance than the retail consumer? Perhaps the practical regulatory solution is to mandate higher capital ratio levels on both the deposit taking and insurance side once exposures reach certain levels and limit the use of revenue derived from safer divisions by riskier functions. Certainly,  risk-taking and innovation are opposite  sides of the same coin but one wonders if such risk taking should be done with grandma’s money.

Over the last year, many commentators have noted that one may have been better off investing in something other than stock market given the 10 year return of a board based U.S. equities index would have returned you approximately nil. But the question arises, if not the stock market then what do you invest your money in?

For some, the question has been turned into an either or answer. Either you invest in the stock market or you invest into some other investment class altogether, ignoring that a healthy balance would serve one well. For most employed people, this other investment class would be real estate (for the entrepreneur, the answer has been, regardless of circumstance, the business; she of the constant need for cash). The either or analysis shows a certain simple-mindedness in thinking since real estate investing can include both investing physically in a real property or a REIT, which is a security.

But, the larger point remains, would an average investor done better investing in real estate or stock?

As stock market investors, we are a pretty poor lot. Using a 20 year period of study, which removes the selection bias of picking a 10 year window with the end date being market bottom,  DALBAR’s analysis estimates that an average investor earned a paltry 1.87% a per annum. The poor results have been attributed to investors investing emotionally and buyin high and selling low.

As real estate investors, we may not be performing that much better. The U.S. Census Bureau took a comprehensive survey of property owners and managers as part of its Property Owners & Managers Survey (POMS) in 1995. The date itself is pretty important since the survey was taken during “normal” market conditions. The source is also important since the Census Bureau has no particular pro or con bias.

Of those surveyed, and regardless of the type of property unit, only 41.4% of all property owners reported a profit. 16.2% of those surveyed answered that they broke even; 26.7% reported a loss and 15.7% did not know whether they made money, broke even or lost money. In other words, the majority of real estate owners lost money. The only downside of POMS is that it does not break down rate of return on real estate investments (I suspect this would be much too difficult to conduct given types of units, geographic differences etc.)

The statistics get a bit grimmer if we begin to drill down on the data.  More people surveyed reported they lost money investing in single-unit condominium units than made money (196,787 lost vs. 192,976 made): a troubling statistic since many real estate investors in large urban regions can only afford to purchase a condo. Only 45% of those people surveyed who owned or managed over 50 units reported a profit; this is surprising since one assumes that a property owner in this scale could make money by sheer volume alone.

As an investment class, some tend to gravitate towards real estate over stock investing because of the tangibleness of the asset. You can touch it, feel it and taste it (if you have a taste for dirt and brick). One also understands the appreciation factor in real estate in normal times but can the same argument not be made for many stocks (especially dividend paying stocks) and what good is appreciation if you are cash flow negative every month on your real estate investment?

A tentative observation can be drawn that, reading DALBAR and POMS together, stock market investing and real estate investing are neither, in and of themselves, good or bad things. Neither asset class has a meaning. Instead, the moral of the story seems to be its not what you invest in but how you invest in it. Most would find it shocking that nearly 16% of those surveyed did not even know where they stood with their real estate investments.  It appears that, regardless of asset class, the average investor has a lot of work to do to become competent managers of their own money.

The recent discourse in personal finance has moved to, among other things, towards instituting programs to increase financial literacy or renewed demands for the government to create new retirement programs to assist the financially vulnerable. While an honest dialogue about traditionally a taboo topic is a move in the right direction, are we not missing the point?

The dialogue presumes a top-down approach to the issue at hand is the right approach.  The conventional thinking is that the schools need to teach us about money and the government should offer new pension plans. But, is not the same top-down approach, ceding our finance responsibilities to those who supposedly “know better”, what lead to hyper government deficits (check out the debt clock), lack of regulatory supervision over bankers and a poorly designed social security system in the United States?

Why would we presume, given past history, that a continued top-down approach to money would lead to a different result? As a wise person once wrote, the definition of insanity is doing the same thing and expecting different results.

Ultimately, financial independence is taken and not given by others. If you are a big fan of the book The Millionaire Next Door, as I am, what the authors noticed is that financially independent individuals spend more time on their own personal finances than those who are not. No school or government mandates that financially independent people spend their free time balancing their books. They are self-motivated to do it themselves through a bottom up approach (as in I’ll pull myself up from the bottom up).

Just some food for thought this weekend. Enjoy the weekend.

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Debt management a problem? Thinking of debt consolidation? Consider ClearDebt IVA.

Now that it appears that the financial system will not sink into a black hole, many of us are waking up and realizing that the government is in a lot debt.  In essence, we nationalized the bank’s sins and we are going to have to pay for it. With a much older population than the last government deficit problems of the late 1980′s, this one may take a lot longer to get out of.

There are two large methods to fight deficits: raise taxes or cut programs. The former is always easier than the latter. Why? Because we want it all. We want our programs and are not willing to give them up.

As illustration of this problem, the State of California is dead broke. But in a recent survey of Californians 67% supported spending cuts over tax increases to solve the state’s deficit. However, a majority of those surveyed also opposed program cuts to 10 of 12 program areas under the state’s jurisdiction. The only programs those surveyed had no issues cutting were parks and prisons (I suspect in the next breath those surveyed cited crime as a concern too and want government to adopt a more law and order agenda).

What does this tell us? When push comes to shove, the environmental agenda takes a back seat to money.  Equally as important, as tax-payers, we are an extremely passive-aggressive lot. Say cut a program and everyone says “yeah!”. The government tells you that they are cutting YOUR program and suddenly it is a sacred cow (call it the NIMP syndrome- not in my program).

Our city experienced this recently. The city cannot balance its budget- it requires the Province to give it a grant- and there was much grumbling about property tax increases. But when the city attempted to close public pools 1 more day of the week or institute higher user fees to save money, the back-lash was quick and severe and the city backed down quickly. Our city is fundamentally mismanaged but, in one of the few times I will defend the administration, how can it solve its fiscal issue if every program cannot be cut (let’s overlook the fact municipal election turnout is 40% maximum)?

This is why, sadly, tax increases are always easier. Programs have stake-holders who can form a lethal and concentrated voting blocks. For example, try cutting back welfare to seasonal fisherman and you’ll lose an entire region of votes.  The benefit is widely unreasonable and should be scaled back but that’s not the point. Fisherman vote en masse for anyone who will maintain this benefit. Politicians are, foremost, self-preservationist and will not dare mentioning cutting this program.

Raising taxes, on the other hand, hits everyone equally and there are always scapegoats (blame the previous government, the U.S., the Russians, the Chinese, the oil industry, welfare bums, the socialists, special interest groups etc.). Every once in a while, a poorly designed tax can topple a government but, as a whole, the entire electorate is a poor lobby group- too big, too divergent, too scattered and increasingly indifferent to really mobilize.

What can you do? The cynic in me says prepare for the inevitable tax increase. The democrat in me (small d democrat) believes its time to clearly articulate what we want as an electorate. Do we want good programs with accompanying high taxes or do we want to be self-sufficient individuals with low taxes? We can’t have good programs with low taxes.  It is all pixie dust politicians sell you to vote for them. In this era of frugality, it is something we should cut back on buying as well.

The state of Florida was one of the epicenters of the real estate bubble and crash. Valuation of real estate increased exponentially and burst painfully from approximately 2007 onward.  As an example, it has been estimated that an astounding 47% of single family mortgages in Palm Beach, Broward and Miami-Dad counties are underwater (i.e. the mortgage is now worth more than the appraised value of the home).

But if you bought before the height of the real estate boom in 2005 and 2006, are you that bad off despite being in the middle of one of the largest real estate corrections?

Research by a University of Florida professor indicates that, in the Orlando area at least, those who bought real estate before the boom would own a home now that is  valued as if the boom and bust never occurred (link courtesy of a good find by Business Week). An average Orlando home today, based on a historical growth rate of 4.7% per year, is valued at what it should be and the run-up in prices and crash put the average home prices back where they should be. In other words, it has been a wild ride but real estate is back where it should be (which actually is a good thing; the world is returning to normal slowly and painfully).

Obviously, this is little comfort for those who bought homes during the boom and received mortgages based on boom time valuations (and real estate valuation is more art than science). But for those who bought before the boom, and assuming they did not refinance their homes based on the inflated valuations, the short-interval of joy when high home values made people paper rich and the grief suffered as housing values dropped should be tempered by the fact your home value could be right where it should be historically speaking.

If you want a quick and dirty way to see whether your home value is where it should be, a quick search of the internet should reveal historical growth rates of real estate in your area. Take the historical growth rate for a 20 year period before 2004-2005 and use that as a sufficient sample size for the growth rate. Take the year you bought your home and apply the historical growth rate per year from the year of purchase to today. If you can’t find a historical growth rate, 6.4% annual growth is the American real estate growth rate for the last 40 years according to the National Realtors Association.

Show me a successful entrepreneur and I’ll show you someone who understands how money works.  Personal finance and entrepreneurship are highly inter-related disciples. What makes one a successful entrepreneur also makes one a good manager of money. Just as improper use of credit card debt can begin a debt spiral for most people, a recent study found that an over-reliance on credit card debt by start-up companies reduces the chances the business will survive past the first three years. In fact, for every $1,000 increase in credit card debt, the probability of survival decreases 2.2%.

This is hardly surprising. Combine high credit card interest rates with the constant need to re-invest in a business and you have a recipe for business failure.

Financing a small business is a larger-scale exercise of personal money management and the lessons of one apply to the other. What then are some best practices to finance a small business?

• Budget your own cash in and build a revenue model around this

In other words, assume no will help you and work around these two pillars of successful boot strap entrepreneurship: (i) build an infrastructure for what you have now and not where you think you will be because who can predict the future? (ii) figure out your break point- the monetary sum you will not exceed putting into your business- and then put that entire amount into the business bank account.Then figure out a revenue model which keeps you in business initially based on that sum of money.

Even if the break point is very modest what it does is it focuses the business on earning revenues quickly rather than to try to chase potential big sales which are cold leads (big sales= long sales cycles = negative cash flow = business death for start-up). As the business gains momentum, the business can think bigger with cash under it to expand (you also work out all the little glitches on smaller sales to chase the big lead successfully).

The alternative, which I had sadly seen too often, is the death by thousand cuts where an owner-manager continually trickles in small amounts of money into the business and exceeds the break point by doing so. The personal finance analogy is negotiate the price of a car based on the price and not what you can afford in monthly payments since if you do the latter you typically end up paying more than your price ceiling.

Can a business be started with no money down? Certainly it can. But if you are seeking financing, one of the first questions that will be asked is let’s see your skin the game. Sweat equity is not valued as greatly by lenders as owner-managers. Thus, if one of your strategies for expansion is to seek financing, you best to put some of your own money in.

• Forget the bank extending a line of credit to a start-up business
  

Unless you qualify under a small business loan program, banks are loathe to take a chance on extending a line of credit to a start-up business. It is a category of business which is seen as too risky. Instead, some entrepreneurs will obtain a line of credit personally while they are still employees and use that line for business purposes first before dipping into credit cards or personal savings.

If a bank offers you a business credit card, take it. In and of itself, a credit card is not a tool of wealth destruction and proper use can build business credit history. It is the reckless use of a credit card that is destructive.

Using a credit card to finance the business is acceptable if one clearly understands the good debt/bad debt concepts. For example, purchasing materials for a closed sale on a credit card would be a prudent use of this form of financing (assuming you build cost of capital into your costs). Racking up thousand of dollars for a staff dinner would not be a wise use of a credit card (there are better and cheaper ways to boast employee morale).

• Assume there are no angel investors or venture capitalists to help you

Angel investors are basically individuals with free cash to invest in your business. For some reason, dentists and doctors are associated with being angel investors (on the theory they make and manage their money well). The issue is that angel investors are few and far between and one could spend their time better selling and marketing then chasing investors.

Venture capitalists are like Trojan horses to many businesses. Most require the owner-manager to cede control and require an exit strategy of selling the business or going public. If this is not your desired exit strategy, the business could be torn apart with competing visions and, given VC’s have the money, the owner-manager is often on the outside looking in.

• Your best strategies are increase cash flow and secure sales

Start producing cash flow and your financing options suddenly open up. In other words, take a “go it alone” financing strategy as much as possible in the beginning and don’t assume a bank will help you (see above). If you are in a business that require heavy capital investment, it may be prudent to start selling services, such as consulting or becoming a reseller, to produce cash flow to scale up. Businesses die not for lack of ambition but for too much ambition. Start steady and build slowly.

If you secure a sale, there are various other types of financing, such as purchase order financing or factoring, that can finance your business. Interest rates can run high so you have to factor cost of capital into your margins (in other words, figure out your costs of sale early in the process).

The key, however, is that most of these types of financing are not typically offered by the banks but by niche lenders. Thus, if there is cash flow and sales in place, one has to ask around. Some banks will refer you off to some of these lenders but you have to do some networking.

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The emphasis here though is, just like in personal finance, don’t expect someone to magically extend you financing when you start up. Worry about what you can control- sales, marketing, expense minimization- rather than hoping that something you can’t control will occur. Best of luck.