Prosperity

Step by Step Credit Repair Guide

2009-09-06T19:55:00.000-07:00

Managing Debt and Credit

2009-07-28T16:45:00.000-07:00

Avoiding credit card overload increases your opportunities to save and invest for important goals.

1. Managing Debt and Credit

Credit was once defined as "Man's Confidence in Man." But in fact, the definition of credit today is more like "Man's Confidence in Himself." Using credit today means you have confidence in your future ability to pay that debt. Forty years ago, your parents may have paid cash for their homes and their cars, a largely unheard-of event today. If they borrowed money at all, chances are it was from a relative or friend, and not a financial institution.

Today debt and instant credit are part of our everyday lives. The convenience of instant credit, however, has taken its toll. Many individuals use credit cards to spend more than they earn, and a few of these people actually build themselves a debt prison from which some never emerge. On the other hand, those who never use credit can be denied a loan or credit when they have a justifiable need or use for it. Using credit establishes a history of financial responsibility: Until you establish a credit history, your chances of qualifying for an important loan, such as a mortgage, are greatly reduced.

What is the balance between using credit wisely and staying out of overwhelming debt? Let's look at the facts and some pros and cons.

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Credit Calculator

2009-07-27T14:38:00.000-07:00

Credit Calculator
Find out the difference in interest between a fixed payment and the minimum credit card payment with bankrate.com's financial calculator.

5 steps to do-it-yourself credit repair

2009-07-19T07:45:00.000-07:00

Blotches on your credit report cost you. But, don't despair. It's never too late to become credit worthy -- just get started, and remember that it won't happen overnight.

Here are 5 steps for improving your credit rating:

1. Order your credit reports
Find out what the top three credit bureaus -- Equifax, TransUnion and Experian -- are saying about you. It's likely that they're all slightly different. Yes, different! Creditors don't have to report to all three credit bureaus, so they typically report to the credit bureau to which they also subscribe.

Time and money is wasted, says Steve Rhode, president and co-founder of Myvesta.org, if you only order a report from one credit bureau. You can order a credit report from each bureau for free once a year through annualcreditreport.com.

If you've been denied credit, insurance or employment because of your credit report, you are entitled to a free copy of your report from the reporting agency. The company you applied to must supply the credit bureau's name, address and telephone number. You have 60 days after receiving the denial notice to request your copy.

2. Examine your reports carefully
Nearly every consumer has an error on at least one credit report from one of the major credit bureaus, says Rhode. Credit bureaus generate your report on information they receive from your creditors; they don't verify.

Keeping your credit report a true reflection of you is -- like it or not -- your job. Get ready to clean and polish. Carefully look for everything from typing errors, outdated and incomplete information to inaccurate account histories. You'll want to make a thorough list of items you dispute and why. Be meticulous.

Find The Best Credit Card Type

2009-06-22T00:38:00.000-07:00

There are a variety of credit card types, each claiming to offer you the best possible deal. Finding the programs and incentives that works best for you is key to maintaining a good credit card history.

Each type of credit card offer different benefits. Some are geared toward the individual consumer, while others are set up to work for small businesses. To find the type of card that best fits your needs, let's review some of the options.

Business Cards

A business credit card offers the business owner an opportunity to keep business and personal expenses separate. The card may offer special business rewards and saving opportunities that go above and beyond what the individual card owner has. Since money management is essential for running a business successfully, this card may offer an expense management service that helps track outgoing money. You can obtain additional cards for employees who may need them for travel expenses and such. You may also have a higher credit limit than you normally would on an individual card.

Student Cards

Many credit card companies will issue student cards with lower credit limits and fewer incentives, helping new card users to keep their spending in check. However, note that many college students now graduate with credit balances averaging from $3,000 to $7,000. With high interest rates, these debts can be a real problem to pay off.

Debit Cards

Prepaid debit cards are 1 type of credit card that has grown significantly in recent years. Although it works like a traditional credit card when making a purchase, that is where the similarity ends. With a prepaid debit card, you actually set the credit limit yourself by depositing money into the debit card’s account. The amount you deposit determines the credit limit on that card. This is a great way to have the convenience of a credit card without the possibility of charging more than you can afford to pay off.

Cards for Bad Credit

Even with bad credit, it is possible to obtain a credit card. These cards come with some restrictions not typically found on other types of cards. Your credit limit will be lower and your interest rate higher. Some may require you to have a secured card, meaning you have to maintain a savings or some other type of account that will cover the expenses on the credit card. Once you have established that you will be responsible in your credit handling, some, if not all, of your restrictions may be lifted.

Cash Back Cards

Many cards will now offer you cash-back incentives for using their cards. Depending on how much your balance is, and how often you use the card, you can earn cash back for your purchases. Some companies offer 1% off your balance while others, like Sears, will offer you cash off purchases made in their store. Either way, if you are planning on using a card, finding one that will offer you a cash incentive is a smart choice.

Read full article here

Prosper.com: America's first people to people lending marketplace

2007-12-31T12:39:00.000-08:00

What is Prosper?

Prosper is a marketplace for credit that enables people to lend money to other people in a safe, efficient manner. Prosper is a leap back to a time when people formed credit communities to help themselves live better lives and earn a fair return on their money. Prosper's founding principle is that people from close communities act more responsibly towards each other. Prosper leverages this powerful concept of group responsibility and applies it to person-to-person lending—resulting in better interest rates for people that borrow and lend.

Prosper enables people to create groups, which borrowers join to request loans up to $25,000 by posting listings indicating the maximum interest rate they wish to pay. Lenders search for and select these listings based on the borrower's credit, debt profile, and group affiliation. Lenders bid on listings by indicating a minimum rate they are willing to accept. When a loan is matched between borrower and lender, Prosper handles all of the tasks needed for payment and collection of the loan.

Who can lend money on Prosper?

2007-12-19T12:28:00.000-08:00

A Prosper lender is any person who is a U.S. resident with a bank account and a social security number. After passing Prosper's anti-fraud and identity checks, lenders offer money to borrowers at a rate they select, often earning a much better interest rate than putting their funds in a money-market account or CD. Learn about becoming a lender.

How Much Should I Save to Reach My Goal?

2007-03-20T11:19:00.000-07:00

What are you saving for: a computer, car, boat, summer home, down payment? Use this calculator to determine what you need to save on a regular basis to have the funds ready when needed.

How Much Should I Save to Reach My Goal? Calculator

What May My 401(k) Be Worth?

2007-03-09T06:45:00.000-08:00

Use this calculator to estimate how much your plan may accumulate for retirement.

What Kind of Loan Should You Get?

2007-03-06T07:26:00.000-08:00

The Homesteader

You've just found a home in a nice neighborhood and you plan to stay there until your kids are through high school. Or maybe you're 65 and are buying your retirement home. In either case, you know you're not moving for at least a decade.

What you want: No doubt about it. In the current environment, you want a fixed-rate mortgage. Rates on a 30-year fixed-rate loan are incredibly low, and though a fixed rate still costs more than an adjustable-rate mortgage, the difference between the two is not that great. The price of stability, in other words, is relatively affordable. If your monthly cash flow permits it, you might consider a 15-year loan. The monthly payment is higher, but you pay less interest over the life of the loan.

Where to shop: Your first stop should definitely be a mortgage banker such as Countrywide Funding. Unlike mortgage brokers, with which these outfits are sometimes confused, mortgage bankers are not intermediaries between you and a lender; they are lenders. Mortgage bankers don't write a lot of adjustable-rate loans, because it's harder to package those for sale to organizations, such as Fannie Mae and Freddie Mac. Thus, because mortgage bankers make their money on fixed rates, their prices tend to be the most aggressive around.

source: yahoo.com

Should I Buy or Rent a Home Calculator

2007-03-01T06:19:00.000-08:00

The decision of whether to rent or buy a home is a very difficult one. To make things easier for you, I found this very good calculator to help you decide what you should do.

The Four Costliest Lending Mistakes

2007-02-26T15:04:00.000-08:00

by Suze Orman

It's never easy to say no to someone you love, especially when they come to you in need of cash. But lending a financial hand can leave you out of money and out of sorts with your friends and relatives.

I often hear from people who have loaned money to someone they care about deeply, only to have to deal with the fallout when they don't get repaid.

Four Pitfalls to Avoid

According to Circle Lending, a company that helps formalize loans between individuals, about 14 percent of loans between friends and family end up in default, compared to just 1 percent or so for bank loans.

To protect yourself financially and emotionally, make sure you don't fall for my top four costliest mistakes individuals make when loaning money to friends and family:

Not being suspicious enough.
When someone comes to you for a loan, your first thought should be, Why? That is, why do they need the money, and why are they asking you for help.
Be incredibly cautious about why they need the money. A friend who gets hit with unexpected health-care bills and is worried about putting them on his credit card at 18 percent interest is a lot different from a friend who needs you to bail him out to settle a gambling debt, or to finance a vacation.
You also need to think hard about why they haven't been able to get a loan from a more conventional source. If a family member comes to you for a loan to start a business, you should ask -- out loud -- why can't he or she get a loan from a bank or the Small Business Administration.
My point is that there are plenty of folks in the business of lending money. If your relative or friend can't get money from one of them, it should set off an alarm for you.
Lending what you can't afford to lose.
Never loan money that you truly need. The best litmus test before you agree to give a loan is to ask yourself if you would be comfortable giving the money away as a gift. If the money is too central to your own financial well-being, then just say no.
There's no guilt or shame in that. If you're dealing with someone who truly loves you, they'll understand. All it takes is a bit of honesty: "As much as I would love to help, I don't have that sort of money to share right now, given all my bills and retirement goals."
You aren't saying, "No, I won't loan you money." You're saying, "My own financial situation makes it impossible for me to help you right now."
Overlooking the extra risk of loans for new businesses.
Say your brother is excited about a business idea, and he wants you to loan him $20,000 to help with the startup costs. This loan is the riskiest of all; your money is actually an investment in a business that may never make a penny.
The only way you're going to be repaid is if the business is a big success. But that's a big "if." It's important to be extra careful with such "dream" loans; the odds of repayments are a lot lower than advancing money to someone who has a steady source of income that will allow them to quickly start repaying you in installments.
Skipping the formalities.

Handshakes, hugs, and kisses are not good enough for sealing a loan agreement. Put everything in writing. In fact, that's another good way to size up the credibility of the person who needs your money: They should tell you right off the bat that they want to sign a formal loan document that spells out all the terms of the deal.

That's a sign that they respect not just you, but the importance of what they're asking you to do. If you have to ask for a contract, that should be yet another warning signal.

8 types of income the IRS can't touch

2007-02-21T05:16:00.000-08:00

By Jeff Schnepper

Don't overpay taxes on income that's protected by the U.S. tax code. Here are the major categories to watch, including five types of raises that don't add a dime to your taxable income.

Tax-free interest

Interest earned on bonds issued by a state, territory, municipality or any political subdivision is free from federal taxes. These are generically called municipal bonds, and their tax benefit increases in value as your marginal tax rate goes higher. (In other words, the bonds are worth more to you as your overall income rises.)

Assume you're in the 35% bracket, the top rate through the year 2010. A 5% tax-free rate becomes the equivalent of a taxable rate of 7.69%. In the 15% bracket, the taxable equivalent is only 5.88%. If you check out this page at investinginbonds.com, you can compare taxable and tax-free yields. Compare the after-tax rates on alternative investments of equivalent risk.

Some bonds may not only be tax-free at the federal level, they may also escape state and local taxes. If you're in the top brackets and live in New York City, this is one investment you definitely want to consider for your portfolio.

Carpool reciepts

Commuting to work? Bring a friend -- and his wallet. If you form a carpool to carry passengers to and from work, any dollars received from these passengers aren't included in your income.

Commuting costs are generally not deductible. But if you establish a carpool and you're reimbursed in amounts sufficient to cover the cost of your repairs, gas and similar items used in connection with operating your car to and from work, then you've converted personal nondeductible expenses into excludable income.

Assume you're in the 25% bracket for 2006 and 2007. You have to earn $133 per month to cover a $100 monthly commuting expense. If you have a carpool arrangement with expenses being reimbursed, you've got no additional income. But you do have an additional $133 per month in wealth!

Sell your house

Under a tax law enacted in 1997, if your house was your principal residence for two of the last five years, you can exclude as much as $250,000 in gain ($500,000 on a joint return) when you sell it.

You don't have to reinvest the money, and you can claim the exclusion every two years. (If you've got $500,000 in gain every two years, I want to meet your real estate agent and go shopping!)

If you don't meet the two-year rule, you can get a partial exclusion based on the time of use and ownership. Assume you sold after only one year and had a $50,000 profit. Your exclusion is half the $250,000, not half the $50,000 profit. In this case, you'd pay zero tax on the sale.

But this partial exclusion is only if the sale is required because of either a change in place of employment, health reasons or unforeseen circumstances. I haven't yet seen final regulations defining "unforeseen circumstances." My understanding is that the IRS is going to be flexible here.

Tax-free compensation
When you're due for a raise, ask your company to get creative in your compensation. There are numerous ways to receive non-taxable compensation. Let's look at some of the best alternatives to taxable earned income.

Use your health coverage. Health and hospitalization insurance premiums paid by your current or former employer are tax-free -- a huge benefit. Let's say your health insurance premiums come to $280 a month or $3,360 a year (for an HMO policy for a family of four with a $1,500 deductible). If you're in the 25% tax bracket and have to pick up the bill, the real cost to you would be $4,480. That's $3,360 for the premiums and $1,120 for additional income taxes because you'll be paying for the coverage in after-tax dollars. Having your company pick up the cost helps both of you. It doesn't have to pay the salary necessary to get you even. It gets to write off the full cost of the coverage. Plus, neither of you has to pay the 7.65% payroll taxes on the premiums. And you, of course, boost your disposable income substantially.

Cover your life. Group term life insurance coverage of $50,000 or less paid for by your company isn't taxed to you. You pick the beneficiary; your company pays the premiums. Your company deducts the expense; you walk away with additional tax-free income.

Send yourself to school. Get educated. The courses don't even have to be job-related. But they can't be for any education involving sports, games, or hobbies. Your company can pay, and deduct, as much as $5,250 per year in educational assistance paid for either undergraduate or graduate courses. Again, that assistance comes to you tax-free.

Get you there…and parked. Your company can give you discount fare cards, passes or tokens to take public transportation to work. As long as it's not worth more than $100 per month, your company can deduct it, but you, as an employee, receive it tax-free as a de minimus tax benefit. You're taxed only on any excess over the $100. If you drive and have to pay for parking, your company can provide free parking, up to a maximum value of $180 per month, to you tax-free.

Cafeteria plans. These are sometimes called Flexible Spending Accounts. Your company makes deductible contributions under a written plan, which allows you to select between taxable and non-taxable benefits. To the extent you chose non-taxable benefits, you have no additional income. Available non-taxable benefits may include group life insurance, disability benefits, dependent care and/or accident and health benefits. Your individual plan details the options. You make your choices among the items on the cafeteria menu.

You get the idea. Any time you can convert taxable income into non-taxable income, you've given yourself a raise. And when both you and your company save money, it's a win-win for everybody.

Get creative…in most cases you're paying for the items anyway, and on an after-tax basis. It's really relatively simple.

Life Insurance Blunders to Avoid

2007-02-19T07:53:00.000-08:00

by Alex Halperin
Monday, February 12, 2007

Other than insurance salesmen, no one likes to talk about life insurance. After all, no one wants to be reminded about their looming death. However, it's hard not to suspect that keeping this subject taboo is more in the interest of insurance companies than consumers. Better informed buyers are more likely to spend wisely. And like dentistry, life insurance can't be ignored forever.

Five for the Money usually advises readers on how to spend or invest wisely. This week, we're twisting it slightly to look at some of the biggest mistakes people make after inhaling deeply and deciding that as adults, they should probably pick up some life insurance.

1. Don't buy the wrong amount

There are rules of thumb about exactly how much life insurance one needs, with 5 to 10 times an annual salary being a common guideline. But these numbers should be taken for what they are: very general numbers. They don't account for an individual's requirements (see BusinessWeek.com, 2/21/05, "Scared to Death of Life Insurance"). "The need that we're often talking about is an income replacement," says David Greene, of financial planning firm Cooper, Jones & McLeland, so that survivors don't encounter financial havoc in the wake of a loved one's death.Starting from the conventional wisdom, Greene says policy holders with a good pension might be able to get by with less than the standard amount. A more common problem is not buying enough—this is even truer in cases where small children are involved. Greene and other experts caution that lump-sum payments that look substantial on paper often don't add up to much compared with a consistent salary spread over many years. Then again, it's hard to imagine too many complaints about receiving too much insurance

2. Don't trust just any insurance agent—shop around

The life insurance options available are dizzying. Charles Massimo, president of CJM Fiscal Management, which works with wealthy clients in Garden City, N.Y., advises against limiting yourself to insurance advisers who are "captive" to one company. This is doubly true for people worried about their health. Insurers calculate risk factors independently of each other, so they won't all give health conditions such as heart disease the same consideration in evaluating an application. "Some [companies] are more aggressive with different risk factors," Greene says. A good place to compare offers from different insurers is Insure.com.

Weighing your options doesn't end with the purchase of a policy. "The standard is, people buy insurance and they put the deposit in the safe-deposit box and never look at it again," Greene says. That's a mistake. The fact is people's circumstances change, and so do the offerings from insurance companies. The policy that best fit your circumstances five years ago might not always be the right choice.

3. Don't be cagey

Most people would rather not talk about their life insurance, what with its intimations of mortality and the implication—still considered tacky in some circles—that a dollar amount can be placed on human life. But if holders don't talk about their policies with the beneficiaries, letting them know what company holds the policy, if not the amount, something worse can happen: Human life becomes worth no dollar amount at all.

Sometimes survivors simply don't know about the deceased's policies, says Steven Weisbart, an economist with the Insurance Information Institute. "It happens much more than it should," he says.

Corporate consolidation can also complicate matters. A policy bought 40 years ago could have been through an outfit that has since been assimilated by an insurance giant. Insurance companies, Weisbart says, like to pay out on policies as it makes for good public relations. Even so, it "becomes very hard to make a claim unless you've got good documentation," he adds. Not knowing where to begin can't help.

4. Don't forget, the world goes on

One of the hardest things for life insurance policy holders to realize is that they'll no longer be around when the insurance pays out. The purpose of it is to protect their immediate family or beneficiaries.

Weisbart says insufficient foresight can hurt relatives. For example: Say a policy holder's spouse receives health insurance from the policy holder's employer. In planning how much a life insurance policy pays, then, the primary caregiver should account for the spouse no longer receiving health insurance. In a slightly less dramatic example, buyers should remain aware that the cost of big expenses like college will continue to increase after they pass away.

5. Don't depend on employer insurance

When asked about life insurance, it can be easy to choose a policy provided by an employer with the premium deducted from a paycheck. But those policies can often provide a false sense of security. Among their other problems, they sometimes expire at retirement, when buying a more comprehensive policy could be more costly.

Worse, group life insurance is less tailored to an individual's health and needs. And often, the policy isn't worth enough money, Weisbart says. "Most group life coverage [plans] are really pretty modest, one or two times salary," he says. "In relation to what [beneficiaries] need, it's not a lot of money." In the end, buying the wrong policy can leave your family shortchanged.

5 big mortgage mistakes and how to avoid them

2007-02-17T07:15:00.000-08:00

By Liz Pulliam Weston

Not fixing your credit

Mortgage brokers say they're confounded at the number of buyers who apply for a mortgage with their fingers crossed, hoping their credit will allow them to qualify for a loan.

Before you even think about applying for a mortgage, obtain copies of your credit report and your FICO credit score. Your FICO score is the three-digit number that's used in 75% of mortgage-lending decisions. You can order your FICO score on the Web for a fee of $14.95, which includes a copy of your credit report.

Doing this at least six months in advance should give you plenty of time to challenge any errors on your report and ensure that they're removed by the time you're ready to apply for a loan. You can also see the legitimate factors that are hurting your score and do something about them, such as paying off an overdue bill or paying down credit card debt.

Not looking for first-time home buyers' programs

These programs, typically sponsored by state, county or city governments, often offer better interest rates and terms than you'll find among private lenders, said mortgage consultant Diane St. James. Some are tailored for people with damaged credit, while most can help people with little saved for a down payment.

Some of these resources are listed on St. James' educational Web site, ABC Mortgage Consulting. You can also call the housing agencies for your state, county and city to see what they offer.

Not getting pre-approved for a loan

Many first-time borrowers confuse being "pre-qualified" with being "pre-approved." Pre-qualification is a pretty casual process, where a lender tells you how much money you probably can borrow based on how much money you make, how much debt you already have and how much cash you have for the down payment.

Getting pre-approval, by contrast, is a much more rigorous process and involves actually applying for a loan. You typically submit tax returns, pay stubs and other information. The lender verifies the information and checks your credit. If all goes well, the lender agrees in writing to make the loan.

In a hot or even warm real estate market, the house hunter who is only pre-qualified is a cooked goose. Home sellers and their agents give much more weight to offers being made by buyers who already have a loan lined up.

Borrowing too much money

Many people take out the biggest loan they possibly can, figuring that their incomes will eventually increase enough to make the payments comfortable. But few first-time buyers have any clear idea of how expensive homeownership can be. Not only will you shell out more for mortgage payments than you probably did for rent, but you'll also need to cover property taxes and homeowners insurance, as well as higher bills for utilities, maintenance and repairs than you faced as a renter.

Lenders are perfectly willing to let you overextend, knowing that you'll probably forgo vacations, retirement savings and new clothes for the kids rather than default on your mortgage.

"Mortgage money … is way too easy to get," said Ted Grose, president of the California Association of Mortgage Brokers. "People tend to overbuy … and that can really stress family life. It's also a formula for foreclosure."

Instead of going to the edge of affordability, consider limiting your housing costs -- mortgage payments, property taxes and homeowners insurance -- to 25% or so of your gross income. That's a much more sustainable level for most people, financial planners say, than the 33% lenders are typically willing to give you.

Not having enough cash on hand after closing

After borrowing too much, and scraping together every last dime for closing costs, many home buyers have nothing left in the bank to pay for anything unforeseen happening --and something unforeseen always happens.

"It costs so much just to move in," Grose said. "Then the water heater breaks."

Some people are so tapped out by the process, Jackson said, that they're not able to make their first mortgage payment on time. That's why "more and more lenders are requiring [borrowers have] three months' reserves after closing," Jackson said.

That's a smart idea for borrowers, anyway. Having three months' reserves, which means a fund equal to three months' worth of expenses, will help you handle the added costs of homeownership with much less stress.

Buy Instead of Renting When You Have the Down Payment

2007-02-15T09:17:00.000-08:00

After looking at all the costs involved in buying house, you may have begun to have second thoughts: Perhaps, it is better to rent a home.

Real estate in most areas today is not a top investment compared with investment securities. "You're not going to get a 30 percent return on your house," said Steve O'Connor, senior director of residential finance at the Mortgage Bankers Association of America. In the past decade, people have been advised to think of a home "as shelter not investment" O'Connor said. "Wealth accumulation is secondary."

Still, as shelter, most experts say if you can afford the down payment, it makes sense to buy your home rather than rent it. That's because you can deduct mortgage interest on income tax and build equity in your property. This is especially true when mortgage interest rates are low. Mortgage interest rates are deductible up to a $100,000 annual limit.

Example
A homeowner has a gross annual income of $40,000. The monthly mortgage payment is $1,000 on a 30-year mortgage. In the first few years, 80 percent of that payment goes to interest and is therefore tax deductible. In the 15 percent tax bracket, the homeowner saved about $375 more in taxes with the home provision versus with only a standard deduction.

Lease-Purchase Agreements
Some people take a middle road. They ease into homeownership by renting a house or condominium with an option to buy.

• Lease-purchase gives a buyer time to save for a down payment or to clean up a credit history.
• It can work in a buyer's favor in areas where real estate values are rising quickly at a rate of 10 percent a year. A buyer benefits from this appreciation because the purchase price of the home is locked in on the day the buyer signed the rent-to-own contract with the seller.
• In most agreements, the seller allows a portion of the rent to be applied towards the purchase price, which some lenders consider to be part of the down payment. The amount of rent credited could be 10 percent to 100 percent, based on your contract.
• Most rent-to-own options require some down payment to secure the agreement, which is not refundable in case the renter decides not to buy.

Homeowners who would agree to a lease-purchase option include people who have had property on the market longer than they wish or owners who had to move and want the house to be lived in. The owner benefits with rental income to help pay the carrying costs of the home, and the strong possibility of selling the house when the contract expires.

Copyrighted, Bankrate.com. All rights reserved.
source: Yahoo!

Finance Your Fantasy Start-up

2007-02-12T08:06:00.000-08:00

by Jessica Dickler
Thursday, January 25, 2007

If your New Year's resolution is to finally get your brilliant business plan off the ground, now is the time to turn those ideas into dollars - and it may be easier than you think.

Finding financing may seem like a daunting task, but before sending a business plan to a dozen venture capitalist firms, look at what's right in front of you.

Many experts suggest getting your idea off the ground with a little help from your friends and family for starters.

In the first phase of fundraising, angel investors, who invest their own cash, are also generally the way to go, according to David Rose, chairman of New York Angels, a group of accredited angel investors.

Angel investors, which generally fit in after friends and family and before VCs, may invest anywhere from $10,000 to $200,000. Sometimes groups of angel investors will pool their funds and invest up to $750,000.

Alternatively, a venture capitalist firm might be willing to invest a few million, but will require a very well honed financial plan and a significant return on their investment.

Shazi Visram, founder and CEO organic baby food company Happy Baby, admits that raising the first couple of thousand dollars was really difficult. Many venture capitalists "said it was too early," she said.

Visram and her partner, Jessica Rolph, turned to friends, family members and other angel investors to raise the $550,000 they needed to get their baby food business off the ground.

"Angels believe in you - are investing in you," Visram said. In the beginning "we didn't need enough [money] for a VC to get excited about."

But once Visram and Rolph got Happy Baby going, they launched a second round of funding to bring the business from the regional to the national market. At that point they were able to successfully draw on venture capital resources.

A little more than a year later, Happy Baby is carried by national gourmet grocery chains including Whole Foods and Wild Oats.

Go where the money is

Venture capitalists consider many factors in addition to the product, including the team, the marketplace, the business plan and the path to profitability. But investors agree that passion and persistence are also crucial.

Howard Morgan, partner at the New York-based venture capital firm First Round Capital which typically considers investments between $200,000 and $500,000, said entrepreneurs "have to have vision and unshakeable passion," but at the same time, should be realistic about their idea, their goals and their potential to make money.

Rose recommends getting a good understanding of the market, what else is out there and where investors are putting their money before attempting to negotiate a deal. With a little research, you can find a VC firm that's well suited for the concept you are pitching. Also, be realistic about how much money investors may be willing to put behind your idea.

The bottom line is that investors want to make money. In fact, considering the number of businesses that never take off, investors have to make their money back on the ones that do. So they are looking for a "big, big, big return," Rose said. That could mean 10 to 20 times their original investment.

To that end, one way to get the door slammed in your face is to promise a certain return on the investment by a specific date. "Don't say things that aren't true," Morgan advised.

Another sure fire way to get denied, he added, is an executive summary that declares "this is the only." Morgan and Rose agreed that if it is the right time for your idea then there are probably others out there thinking about it too.

Rose, who has been approached by three separate teams in the same week to produce and distribute high-end rum, says "you can never know what the investors have seen before," so "don't be naive to think that you are unique."

Seven Alternative Sources of Capital for Setting up a Business

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Borrowing from banks is every small entrepreneur’s nightmare. One gets turned down for bank loans for a variety of reasons, including lack of assets, collateral and business experience. Don’t despair, however. There are several common types of alternative sources of capital for setting up a business available to young companies.

Savings and Investments

The first source you should consider is your own savings and investments. One disadvantage though of self-financing is that if things did not turn out the way you want them to be it will be your money that goes down with the ship.

Angel Investors

Angel investors are affluent individuals who provide capital for a business start-up, usually in exchange for ownership equity. These individuals are looking for a higher rate of return than would be given by more traditional investments (typically 25% or more).
Angel investors are an excellent source of early stage financing and high-growth start-ups. They are often willing to tread where there is too much risk for banks and not enough profit potential for venture capitalists. And since angel investors are often retired business owners and executives, they can also provide valuable management advice and important contacts.

Peer to Peer Lending

Peer-to-peer lending is a means by which borrowers and lenders may transact business without the traditional intermediaries, such as banks. It can also be known as social Lending, ordinary people lending money. The process may include other intermediaries who package and resell the loans--examples are Prosper and Zopa-but the loans are ultimately sold to individuals or pools of individuals. Prosper.com, which is available in the US only, offers business loans for small companies.

An enabling technology for peer-to-peer lending has been the internet, which connects borrowers with lenders, for example through an auction-like process in which the lender willing to provide the lowest interest rate "wins" the borrower's loan. (wikipedia.com)

Money pool
Instead of a bank loan, borrow smaller sums from several family members, friends, or colleagues. The lenders have no legal ownership in the business, but can act as advisors and cheerleaders for your venture. Remember though that nothing causes tension in a family like lending money that is never paid back.

Credit Cards
Many business owners use their credit cards to fund their businesses. Credit cards offer the ability to make purchases or obtain cash advances and pay them at a later time. But as a long-term financing method, they can be expensive. Most credit cards will charge you 2% to 4% of the face value of a cash advance as a "fee" making this method of financing very risky.

Bootstrapping

Another source of capital for setting up a business is bootstrapping. It is a way to finance a business by saving rather than borrowing money. It's being as frugal as possible so your business can be started on as little cash as possible.

The use of private credit cards is the most known form of bootstrapping, but a wide variety of methods are available for entrepreneurs. Other forms of bootstrapping include owner financing, minimization of accounts receivable, joint utilization, delaying payment, minimizing inventory and subsidy finance.

While bootstrapping involves a risk for the founders, the absence of any other stakeholder gives the founders more freedom to develop the company. Many successful companies including Dell Computers were founded this way.

Venture Capital

Venture capital is not suitable for all entrepreneurs. It is an option for small companies that have a seasoned management team and very aggressive growth plans; however, venture capitalists will rarely invest in small businesses that have no intention of going public. If a company does have the qualities venture capitalists seek such as a solid business plan, a good management team, investment and passion from the founders, a good potential to exit the investment before the end of their funding cycle, and target minimum returns in excess of 40% per year, it will find it easier to raise venture capital.

The venture capitalist objective is to invest in a company for a short period of time – say 5 years – and then cash out of the business while making a significant return on their investment.

How to borrow at Prosper

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Borrowing money through Prosper is fast and easy, and because you're borrowing from people, the rates may be lower than you'd expect!

1. Register with Prosper
Registration is quick and easy. And free!

2. Join a Group
Build lender trust by joining a trusted group.

3. Create a Loan Listing
Say how much you want to borrow, and what your maximum interest rate is.

4. Watch the Bidding
Lenders start bidding immediately - watch the funding go up and the interest rate come down!

5. You Win!
If your terms are met, your loan will be funded directly to your bank account.

6. Easy monthly payments
Your monthly loan payments are withdrawn automatically from your bank account.

Prosper's Marketplace Performance

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The marketplace performance page includes performance data for Prosper marketplace loans. Using this data, lenders can gain a better understanding of the dynamics of the Prosper marketplace, and use that knowledge to influence your lending strategy.

For example, when you have adjusted all of the listing criteria to your liking, you can click "View matching listings" to view active listings that match those criteria or click "Create a standing order" to create a standing order which automatically bids on listings that match those criteria.

How quickly will a borrower receive money once a loan is matched?

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Borrowers typically receive their loan within 2 to 4 business days of the end of a successful listing.

How is Prosper regulated?

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Prosper is regulated at a few different levels of U.S. government.

At the federal level, Prosper is regulated by the Federal Trade Commission insofar as it must conform to the Truth in Lending Act, the Equal Credit Opportunity Act, and the Fair Credit Reporting Act.

At the state level, for states in which Prosper has an explicit license to lend, it is regulated by such state agencies as the Department of Banking or Department of Financial Institutions (this varies by state). For states in which Prosper does not hold a license, it is subject to limits and regulations established by the state's Attorney General's office or other agencies that regulate trade and commerce. You can see which states Prosper holds licenses in along with any special limits or regulations by state on the "States and Licenses" page.

Who are the borrowers?

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A Prosper borrower is any person who is a U.S. resident with a bank account and a social security number. After passing Prosper's anti-fraud and identity checks, borrowers can request unsecured loans from $1,000 to $25,000 at rates they select. Borrowers should join a group to ensure they get access to the best rates. Prosper allows borrowers to post listings on the platform regardless of their credit or income.

What exactly happens if I'm late?

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Below is the schedule that Prosper follows in the event of a borrower missing a payment due to insufficient funds (NSF). At any point in this process, if your outstanding payment is paid in full, your account will be returned to "Current" status.

One week before payment is due

You will receive an email from Prosper indicating the date and amount of your upcoming payment.

Day 0: First payment attempt

On the day your payment is due, Prosper will attempt to withdraw payment from your bank account.

Day 1-5: First failed payment

You will be charged a failed payment fee of up to $5, depending on your state lending limits. Failed payment fees are collected by Prosper.
You will receive an email from Prosper indicating the amount due, fees accrued, and notifying you about upcoming payment attempts.

Day 8: Failed payment notification

You will receive another email from Prosper indicating the amount due, fees accrued, and notifying you about upcoming payment attempts.

Day 10: Second payment attempt

Prosper will attempt to withdraw payment from your bank account a second time.

Day 16: Second failed payment notification; late fee assessed

You will be charged a second failed payment fee of up to $5, depending on your state lending limits. Failed payment fees are collected by Prosper.
You will be charged a late payment fee for being more than 15 days late on your monthly payment. Late fees are the greater of $15 or 5% of the unpaid installment amount, depending on your state lending limits. Late fees are passed on to lenders; Prosper does not profit from late fees.
You will receive an email from Prosper indicating the amount due, fees accrued, and notifying you about upcoming payment attempts.
If you are a member of a group, your group leader will receive an email from Prosper notifying them about your delinquency and the effect of your delinquency on the group's reputation.

Day 22: Third payment attempt

Prosper will attempt to withdraw payment from your bank account a third time.

Day 26: Third failed payment notification

You will be charged a third failed payment fee of up to $5, depending on your state lending limits. Failed payment fees are collected by Prosper.
You will receive an email from Prosper indicating the amount due, fees accrued, and notifying you that your loan will be turned over to an outside collection agency for collections.
If you are a member of a group, your group leader will receive a second email from Prosper notifying them about your delinquency and the effect of your delinquency on the group's reputation.

Month 1: Late fee assessed; loan sent to collections

You will be charged a late payment fee at 46 days past due for being late on the next month of monthly payments. Late fees are the greater of $15 or 5% of the unpaid installment amount, depending on your state lending limits. Late fees are passed on to lenders; Prosper does not profit from late fees.
Your loan will be sent to the collection agency partner selected by the lenders with the largest participation in your loan. The collection agency will attempt to collect the amount due and any fees accrued. Learn more about Prosper's collection agency partners.
Your delinquency will be reported to Experian, Prosper's credit reporting agency partner, and will appear in your credit history. Your credit score will be negatively impacted.

Month 2: Late fee assessed; collections continue

You will be charged a late payment fee at 76 days past due for being late on the next month of monthly payments. Late fees are the greater of $15 or 5% of the unpaid installment amount, depending on your state lending limits. Late fees are passed on to lenders; Prosper does not profit from late fees.
The collection agency assigned to your loan will continue attempting to collect the amount due and any fees accrued.
Your delinquency will be reported to Experian, Prosper's credit reporting agency partner, and will appear in your credit history. Your credit score will be negatively impacted.

Month 3: Late fee assessed; collections continue

You will be charged a late payment fee at 106 days past due for being late on the next month of monthly payments. Late fees are the greater of $15 or 5% of the unpaid installment amount, depending on your state lending limits. Late fees are passed on to lenders; Prosper does not profit from late fees.
The collection agency assigned to your loan will continue attempting to collect the amount due and any fees accrued.
Your delinquency will be reported to Experian, Prosper's credit reporting agency partner, and will appear in your credit history. Your credit score will be negatively impacted.

Month 4: Loan sold to debt buyer; credit history and credit score impacted

After four months of delinquency for any single payment, your loan will be sold to a debt buyer and any proceeds will be distributed to lenders.
Your delinquency will be reported to Experian, Prosper's credit reporting agency partner, and will appear in your credit history. Your credit score will be negatively impacted.
Borrowers who have defaulted on a loan at Prosper will not be allowed to borrow again on the Prosper marketplace.

Detailed Payment and Delinquency Fee Schedule

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What happens if I am late on a monthly payment?

Each month, your monthly loan payment is automatically withdrawn from your bank account on file. If you receive an email from Prosper that your payment failed, it means that your account has insufficient funds, or that the bank account on file at Prosper is out of date or incorrect. In either case, you will pay a failed payment fee and can fix the problem with no further penalty by making a manual payment and ensuring that your bank account has sufficient funds. Just go to "Your Account > Borrowing" and click the "Make payment" link. If your bank account information is out of date, be sure to add a new bank account first.

If you can't make a payment, Prosper will follow the delinquency schedule shown in full detail below. Please note that at all times interest continues to accrue on the principal balance of your loan, in addition to any failed payment or late payment fees assessed.

What's the best way to get current on a late loan payment?

Go to "Your Account > Borrowing" and click the "Make payment" link.

You will see the amount and date of your missed payment, along with any additional fees that have accrued. Simply enter the amount that you want to pay, and the transfer should complete in 2 to 4 business days.

Once payment is received, your account will be made current. The next month's payment will be due on the regularly scheduled date.