How to finance a business - for dummies and non-dummies

So you have come to SL to earn some money. Maybe you want to live out a small dream of you owning a shop. Well, despite from what LL said about "join SL and earn real cash", it isn't that easy here.

I will leave out the part of learning the neccessary skills and finding the product you want to sell. Instead I'll jump directly to the finance part of the process here.

The situation:
You have decided to buy your own land instead of putting your products in a laggy mall. Having the ability to use the "parcel directory" is a nice way to advertise your shop which is only available to landowners.

Or you want to put yet another xxx-casino-dance-brothel where you don't have any other choice but to buy your own land.

The possibilites:
1. Financing the whole operation with your own money
This is the easiest way to get some money. You can always take your credit card and buy some L$ from Lindex. You even do a good thing for the economy by doing so.
Yet sometimes problems may arise:

a. Your wife/husband will rip your head off if she/he sees you spending RL money in a "game".

b. You are afraid of losing RL money because of the unstable exchange rate.

c. You don't want to pay the credit card fees.

If one of the three points applies to you, you might think about

2. Financing with "outside capital" (i.e. loans)
Loans are really hard to get in SL. The investors are carrying a very high risk of losing money if you decide to run away with it. Contracts made in SL aren't enforcable which is a big obstacle for RW businesses to come to SL.

If you get a loan, you will have to pay a fixed interest rate per day/week/month/year. Depending on the contract, you either have to repay the debt in a weekly/monthly rate OR you repay it at the end of the "contract" term.

It is your highest priority to be able to repay your debts!

3. Financing with the help of partners
The money you get here is refered as "smart capital". It is smart because you don't only get the money but you also get the expertise of your partners. They bring in experience and business connection into your company.

In contrast to loans, this money is counted in the "owner's equity". Your partners will get a certain percentage of your profit. If your business is running well, your partners will get more money. If you are making negative profits, your partners will also carry part of the loss.

So if your company goes broke, you don't have to pay anything to them unlike outside capital.

4. Financing with shares
This is what we call "stupid money". Similar to point 3, the shareholders get dividents depending on the amount of their share, but you can't expect them to help your business in a non-monetary way. That's why the money is "stupid".

Because of the lack of a proper stock market in SL, I don't want to go into detail on this point.

Tips and annotations:
If you try to get a loan of somebody, you have to think about the following points:

1. We (the investors) prefer premium members. Premium members have bigger sunk costs in form of the membership fees and are less likely to run away with the money. They also have the stipend with which they can repay the debts if things go wrong.

2. We prefer "older" premium members. Same reason as above.

3. Other sources of income is always good. Like in RL, you have to prove that you don't need a loan in order to get one hehe

4. Experience in having a shop. Business masterminds have a higher rating as a business newbie.

5. If you are already running the business and you only need money for expansion, showing a balance sheet + income statement is a good way to impress the investors.

6. Give as much information about the business as you can. Estimated profits; what are you selling; what is the situation regarding competition etc.

7. Having a certain amount of capital which is coming out of your pocket is always good. You show us investors that you are willing to risk your own money on that project.

8. Based on the information above, we will give you a rating. This might result in

a. no loans given out

b. a loan with a very high interest rate (due to the high risk)

c. a loan with a low interest rate

9. Either way, prepare to pay a daily interest rate of 0.11% and more. That is because we can put that money into our Ginko accounts instead of giving it to you.

Much success with your business.

Mad Wombat

Actually, I saw a 3 step model that effectively described how to make it big in SL. I shall repeat it here, but I cannot remember who first posted it:

1. Open Your Business
2. ?????
3. PROFIT!!!

Hehe, this thread just describes a small part of the 3 step model.

True dat

Can we have this thread pinned to the forum?
And btw, feel free to write other how-tos so we can cover up the entire 3 step model.

This is unfortunately often the case. I'm approached regularly by small groups building the best of the best of the best sir project and offering me an opportunity to get in on the ground floor by placing my products in their area.

They sometimes have good ideas; but almost invariably expect the build to generate income without hours of daily attention and contribution from them. I can't begin to imagine how many thousands of US dollars have poured into that hole over the past couple of years.

What is it that makes people think that operating a business in Second Life requires any less work than operating one in the real world?

ALL HAIL THE UNDERPANTS GNOMES OF SOUTHPARK!

This appears to be an ad.

Wishful thinking is what makes people think they can make money quick and easy in here. Go back to that much touted business week article. I don't think it mentions how long any of the people work to make their money. People (in general) see "These people make a living in SL" and think 'I must be able to do that' or 'Oh good, free money' the members of the first camp may or may not be right. The members of the second are rarely happy. Or smart.

Of course it has nothing to do with a couple of years of flogging "play a game, get your money for nothing and your chicks for free" as the primary selling point of SL.