One key to a successful business is your ability to raise money and obtain appropriate financing for your new business. Raising capital is the most basic of all business activities. Remember, it takes money to make more money.
While venture capital may be overflowing for the Internet start-ups and Silicon Valley tech companies, 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 –
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.
Read the article “How to Borrow Startup Capital from Family and Friends”
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.
Read the following articles:
- What Makes You Eligible for Venture Capital?
- How to Attract Venture Capital Financing
- Understanding the Kinds of Capital for Your Business
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.
Read the articles:
- Qualities Angel Investors are Looking for in a Business
- What is an Angel Investor?
- Why Investors Reject Your Request for Funding
How to Raise Money to Start a Business (Part 2)
Recommended Books on How to Raise Money to Start a Business:
- Money to Start a Business: How To Raise All The Money You’ll Ever Need To Start Your Own Business
- Get Your Business Funded: Creative Methods for Getting the Money You Need
- Financing Your Small Business: From SBA Loans and Credit Cards to Common Stock and Partnership Interests (Quick Start Your Business)
- How to Get the Financing for Your New Small Business: Innovative Solutions from the Experts Who Do It Every Day
- Unlimited Business Financing: Learn How To Obtain $250,000 Or More In Business Funding Without Harming Your Personal Credit
- Pros and Cons of Financing a Business
- How to Find an Angel Investor for Your Business
- How Angel Investors Can Benefit a Small Business
- How to Raise Capital in the New Economy
- What Investors Want Before Funding a Business