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Personal Savings
Family Members and
Friends
Venture Capitalists
Angel
Investors
Banks
Industrial Banks
Advertising
Credit Cards
Small Business Investment Companies
Business Development Commissions
Life Insurance
Money Broker or Finder
(article continued below ...)
One
key to a successful business start-up and expansion is your
ability to obtain and secure appropriate financing. Raising
capital is the most basic of all business activities.
Remember, it takes money to make more money.
Flip open trade publications and business
newspapers, and you will be bombarded by reports of abundance of
available capital for entrepreneurial start-ups, particularly
for the dot.coms. The
financial news would have you believe that more money is available for new business ventures than there are good
business ideas.
However,
while venture capital may be overflowing for the Internet
start-ups, the real scenario for small businesses (and worse,
home-based businesses) is far different.
Capital is hard to come-by, especially if: (a) you do not
have a good business idea or business plan that will make rich
backers run to you in the hope of multiplying their savings
exponentially; and (b) you may have a good business idea, but
you do not know anyone who matters. The problem is that
most beginning "business builders” doesn’t know what to
believe or which way to turn for help.
Then again, business means risk, and success comes to those
who focus on their goals and actually do something. Who knows,
you may be lucky and dispel stories of “tight money.”
You first step should be to start making phone calls --
talking to people, and making appointments to discuss your plans
with the people who have money to invest.
When you're looking for money, it's essential that you
get the word out to as many potential investors as possible.
There are several sources to consider when looking
for financing. Don't make the mistake of thinking that the only place you
can find the money you need is through the bank or finance
company. Explore all of your options
before making a decision. These include –
Personal Savings.
The first place to look for
financing is right at home and personal savings and assets are
the easiest source of capital. If you have money set aside, you
use it instead of borrowing or rounding up investors. Or, you
can take an inventory of items
you do not need and have a garage sale. Most people are
pleasantly surprised how much cash they can raise in a single
weekend. You can also use your stocks, bonds, pension plans, life
insurance policies and real estate to raise the needed capital.
Those who own homes oftentimes secure equity loans and use the
proceeds to start a business.
However,
most beginning entrepreneurs don’t have adequate personal
savings to fund a business start-up. Others, on the other hand,
have savings but refuse to dip into their piggy bank for a
variety of reasons. It may be their retirement money or for
emergencies; while others would rather use their savings as
collateral and borrow against it at a low interest rate.
Family Members and Friends.
Next, turn to members of your family or close friends who
have faith in you and want to see you succeed. Borrowing from a
friend or relative is generally the most readily available
source, especially when the capital requirement is smaller.
Relatives and people you know need fewer assurances and are more
open to your ideas than professional investors. They are also
more patient if your business takes longer than expected to get
off the ground. Offer to repay them through profit sharing.
If you are borrowing from family members instead of
asking them to invest, maintain a very businesslike and
impersonal procedure. To
avoid putting strain on the relationship, it is better to draw
up a formal agreement in order to put the terms of the loan in
writing. It is
important to view the participants as business associates.
Venture Capitalists.
Venture capitalists are
professional investors who may be in charge of a large pool of
capital gathered from a range of sources. These firms invest in
new, even high-risk or speculative businesses without a proven
track record, with the potential for rapid growth and high
returns in a short time. They
generally want equity or part ownership of a business in
exchange for substantial returns (25 to 40 percent or more) when
they exit typically in three to seven years.
Particularly in the Internet sector, several venture
capital firms have achieved capital gains of 300 to 500 percent,
which are used to offset by a wide margin any losing ventures.
These firms are mostly interested in potential projects that
require $500,000 or more because of the high cost of
investigation, evaluation and administration.
While a venture capital firm may receive as many as 1,000
business proposals a year, it will typically investigate less
than 10 percent and may actually invest in only 3 or 4 percent.
Angel Investors.
Angels are private investors
interested in making more on their capital than they can make
through traditional markets such as mutual funds or publicly
traded stocks. These “angels” can be your accountant,
attorney, doctors or other individuals who seek out new
businesses to invest in return for equity ownership.
Usually providing additional capital in the range of
$25,000 to $500,000, expect angel investors to demand high
returns for their investments. Relative to venture capitalists,
though, angel investors are less demanding and can also be
expected to provide expert guidance and mentor the start-up.
As you explain your plan to them, and ask for their advice,
casually ask them if they'd mind letting you know of, or steer
your way any potential investor they might happen to meet.
Do the same with your banker.
Give him a copy of your prospectus and ask him if he'd
look it over and offer any suggestion for improving it, and of
course, let you know of any potential investors.
In either case, it's always a good idea to let them know
you're willing to pay a "finder 's fee" if you can be
directed to the
right investor.
Professional people such as doctors and dentists are known to
have a tendency to join occupational investment groups.
The next time you talk with your doctor or dentist, give
him a prospectus and explain your plan. He may want to invest on his own or perhaps set up an
appointment for you to talk with the manager of his investment
group
Note, however, that most angels and venture capitalists do
not invest in home businesses.
Continue
to Part 2
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