Launching a new business requires much skill and preparation. Entrepreneurs may not have the resources to raise capital in order to market their new business ideas; therefore, some great business ideas never become commercialized. This is a common dilemma that many entrepreneurs face. They often speculate about how to raise capital and same time, are unsure about how their startup will have the needed financial security to properly stay on track. Before a new business owner can raise capital for their startup, they must first identify the different sources of funding, find one that is most compatible with their needs, and then meet the given criteria of the investor or bank. These crucial steps can mean the difference between having the opportunity to successfully raise capital and leaving their new business ideas behind.
Research – Entrepreneurs are encouraged to first investigate their funding options and conduct comprehensive market research to fully understand their potential targeted consumer base and any major competitors. Such information can be readily available both online and offline.
The information superhighway – The internet has become the fastest and most efficient means by which a new business owner can perform market research and find out ways to raise capital. One important website to visit is the Small Business Administration (SBA) (www.SBA.gov), which can provide the necessary facts and resources needed for starting their new business. Every entrepreneur should take advantage of this valuable online resource so that they can become aware of all the different types of funding available. They will also be able to learn about how to meet the desired criteria in order to effectively raise capital for their new business.
Offline resources – In addition to online resources, new business owners can also visit the public library or read through the local newspaper to find out more information on how to raise capital. The prospective business owner can also speak to successful entrepreneurs who have experience in the field. Since experienced entrepreneurs have been through this process already, they can provide a wealth of information to the new business owner. The entrepreneur can also build a network of contacts through them, receive constructive advice, and find out how they can raise capital for their new business. Every entrepreneur can greatly benefit from an experienced business owner’s wisdom, further giving them a leading advantage to raise capital.
Identify Sources of Capital
There are different types of financing that will enable an entrepreneur to raise capital for their new business:
This is a type of financing is essentially an exchange of money for a piece of ownership in a new business. This type of financing can usually be provided by venture capitalists and angel investors.
An advantage of using equity financing as a way to raise capital is that the new business owner can pay back the loaned amount throughout a fixed duration of time. In addition, the new business owner can focus on making their product(s) profitable rather than worrying about paying back the investors immediately.
One possible disadvantage of utilizing equity financing to raise capital is that the new business owner may lose partial or complete autonomy over their new business. Often times, angel investors or venture capitalists may want to have a large share in their invested company as well as have a say in every business decision made, including routine ones. A new business owner needs to explore the different options to raise capital as well as consider each of its benefits and disadvantages before deciding on what suits their new business the best.
Using personal finances or “bootstrapping” is one of the first sources that an entrepreneur may consider using when they decide to raise capital for their new business. Money can be obtained from personal checking and savings accounts, credit cards, and retirement accounts. In addition, equity can be collected from the sale of real estate properties, vehicles, recreational equipment, and even rare collectables. In fact, some wealthy entrepreneurs can choose to raise capital for their new business using their own personal funding. On the other hand, many new business owners may opt to utilize a combination of different sources to raise capital.
Friends and family
Other than self-financing, family members and friends can provide an additional means to raise capital for a new business. Many of these loans can be made available rather quickly because these families and associates know the entrepreneur personally and enjoy the excitement of the new business venture. Borrowing money from friends and family can work both for and against the new business owner. Family members and friends may feel that they should have say in every company decision or may desire a large stake in the new business since they had lent money to the entrepreneur. This can lead to resentment and relationship strains among all parties involved. New business owners need to evaluate the different possibilities that may occur when they decide to use their friends and family members to raise capital since it can result in complicated matters.
Angel investors and venture capitalists
New business owners can also raise capital from angel investors and venture capitalists through equity financing. By investing in the equity of a business, angel investors and venture capitalists expect a large return on investment in the form of an acquisition, IPO, or stock buy back in the future. While this may not seem the most attractive, it is certainly an avenue to explore, especially if all traditional routes to raise capital have been exhausted. One disadvantage of equity financing is that even though the new business owner may be able to raise capital, they may have to give up some of their company’s rights, since angel investors and venture capitalists often desire a large stake in the company or executive board seat. For many entrepreneurs, angel investors and venture capitalists may be their only resort to raise capital for their new businesses.
New business owners can also raise capital through debt financing. In its simplest terms, “debt financing” means a loan. Usually, this form of capital for a new business is offered by banks and accredited government agencies, such as the Small Business Administration.
When new business owners use debt financing as a means to raise capital, he/she will owe money to the lending agency, which is usually a bank. The strong relationship between the new business owner and the financial institution continues for the life of the loan and ends once the new business owner pays back the entire amount.
An advantage of debt financing as a way to raise capital is that the entrepreneur is able to retain maximum control over their new business. In addition, interest on debt financing is often tax deductible. However, one disadvantage of debt financing is that the high debt may look unattractive to other investors who are also involved in the project. This money owed may discourage other financiers from lending further funding and can often disqualify a new business owner from the opportunity to raise capital in the future.
Secured vs. unsecured business loans
Business loans provide new business owners exactly what they are looking for: the necessary funding to raise capital for their new businesses. These loans are offered as either secured or unsecured debts, which are specially designed to fit the monetary requirements of the new business owners.
Secured loans – If the new business owner decides to apply for a secured loan, they will need to find collateral in order to raise capital for their new business. Personal, commercial or residential properties, invoices, or even recreational equipments can be considered deposits to secure the loan. Secured loans are a popular alternative for entrepreneurs to raise capital for their new businesses.
Unsecured loans – If the new business owner does not want to use collateral as a form of security to raise capital for their new business, they have the option to apply for an unsecured loan. Even though unsecured loans are not as large in amount as secured loans, this may be more compatible with the new business owner’s needs. An unsecured loan is also a popular option to raise capital for a new business.
In both types of business loans, entrepreneurs are able to raise capital for their new business based on their credit rating.
Government funding and the SBA
Government loans by the Small Business Administration are also considered a valuable source for new business owners who seek to raise capital. Since their inception in 1953, the SBA has provided a resourceful means for several thousands of new business owners to raise capital. In fact, the SBA has financed more than 219,000 new business owners with loans of more than $ 45 billion. The role of the SBA in providing new business owners the opportunity to raise capital has dramatically increased in the last decade. In the past 10 years, the SBA has enabled almost 435,000 new businesses a total amount of more than $94.6 billion. It is no wonder that the SBA is considered to be one of the leading resources for new business owners to raise capital.
However, before approaching the SBA as a source to raise capital, entrepreneurs should be aware that the SBA does not lend money directly to new businesses, but instead, acts as a guarantor through a network of local lending partners to help promote the startup, growth, and success of small businesses in the United States. Since every new business is different and has its own specific monetary needs, entrepreneurs need to properly estimate how much capital will be needed for their new businesses. Some new businesses can be started on a small budget, while others may require considerable investment in inventory or equipment. It is vital for entrepreneurs to estimate this amount before deciding to raise capital through the SBA.
The advantages of applying for an SBA loan
The advantage of applying to the SBA for startup capital is that it offers more flexibility than other loans that are offered by traditional lending institutions. However, new business owners may not find the SBA an easy source to raise capital. New business owners who are planning to raise capital through the SBA need to meet minimum criteria and furnish details of their business profile, loan request amount, collateral details, business financial statements, and personal financial statements.
Most financial analysts suggest that new business owners should be able to raise capital easily through prequalification. Prequalified capital can be made possible through intermediary organizations which assist prospective borrowers in developing viable loan application packages and securing loans. Many of these preapproved loans are made available to many minority groups.
Determine Your Startup Expenses
Once a new business owner identifies the different sources of funding available, they should now determine the amount of money that is needed to raise capital. Startup fees can be rather steep since office expenses (including rent and utilities), research, development and marketing costs, technological expenses, and employee payroll and benefits are considered to be necessary business expenditures. Legal and professional fees should also be considered as well as the basic living salary for the new business owners for at least one year. During a young company’s initial years, all of these expenses can accumulate very rapidly, discouraging new business owners how to productively raise capital. However, with a solid business plan as well as ample industry and funding research, new business owners can definitely increase their chance to raise capital for their new business.
Financial crisis can mean failure
There are many reasons why new businesses do not succeed; however, deficient funding remains one of the significant reasons behind a company’s failure. In fact, all too often, the amount to raise capital for a new business can be frequently overlooked. In addition, many entrepreneurs with precarious economic circumstances are putting their new businesses at risk for failure simply because they have underestimated the monetary costs of running their new business. Rather than resorting to raise capital elsewhere, these new business owners tend to limit much of their business-related expenses which immediately restrict their new business’ capacity. As a result, this greatly threatens their company’s potential growth and stability.
Seeking financial help from outside sources
If any new business owner is ever in a desperate financial situation and need additional capital to sustain their new business or to revive their finances, then they are strongly recommended to raise capital from outside sources. This can come in the form of a loan, either from a bank, friends and family, or personal investors, such as an angel investor, who can all effectively raise capital for a new business. Although many new business owners may underestimate their start-up costs, they should not be discouraged about their rapidly growing expenses since many different exist to raise capital. It is extremely important to research all of the different avenues thoroughly in order to become familiar with the various choices and the processes involved in order make a well-planned and educated decision. Education and preparation are the two most important components that will lead new business owners to successfully raise capital.
What You Need Before Going to an Investor or Bank
The importance of a business plan
In order to effectively raise capital, every new business idea with marketable potential should always be accompanied by a well-constructed, comprehensive business plan. To create such an extraordinary business plan, new business owners must first organize their thoughts, and then create a documented first draft. New business owners are also encouraged to seek the assistance in proof-reading in order to avoid any errors, which can seriously damage their overall credibility and chance to raise capital. A well-written business plan is the key for new business owners to successfully raise capital.
Many successful entrepreneurs strongly believe that preparing a business plan is similar to writing a resume. The new business owner has to focus on every detail, explain their academic background and credentials, and clarify how their experience could add value to the new business endeavor. In addition to providing several references, the business plan should be constructed in such a way that it leaves potential investors speechless, with no further questions asked. By creating a well-prepared, solid business plan, new business owners will greatly increase their chance to raise capital for their new business endeavor. In addition, their solid business plan will also improve their chance to raise capital throughout the development of their new business.
To further increase one’s chance to raise capital, new business owners are encouraged to seek the help of professional legal consultants or accountants. These professionals serve as a valuable resource to new business owners who want to raise capital since they can provide new business owners with all of the necessary paperwork for their business plan. They can even develop the entire business plan for the new business owner. But before seeking their help, the new business owner must make sure that these professionals are accredited and that they have experience in the field of new business startups. The assistance of accredited, experienced professionals when preparing a business plan will definitely impress investors, increasing the entrepreneur’s chance to effectively raise capital.
Fixed vs. variable expenses
In addition to a solid business plan, new business owners must be able to differentiate between two types of expenses that they will have. These essential startup expenses can be divided into two separate categories: fixed and variable. Once both types of costs are evaluated and a total amount can be predicted. Bankers and investors expect new business owners to know these costs in order to estimate how much capital will be awarded.
Fixed expenses- New business owners need to consider the amount they have to pay for rent, utilities, administrative costs, and insurance costs when they decide to raise capital.
Variable expenses- New business owners also need to take into account inventory, shipping and packaging costs, sales commissions, and other costs associated with the direct sale of a product or service for their new business when they decide to raise capital.
Things That Matter to an Investor
Financial projections in the business plan
There is no doubt that an effective business plan is needed to successfully raise capital. Included in a business plan should be a financial worksheet which outlines all the various categories of costs that can accrue monthly. By using a financial worksheet, the new business owner can provide lenders and investors three very important financial measures in order to raise capital- the income statement, cash flow statement, and balance sheet. The income statement is probably the most important component of the three to raise capital. It includes a projected cost report, which provides projected revenues and the expected income for the new business owner in the next 3 to 5 years. Providing such financial predictions will enable the new business owner will gain credibility from their financial lenders. It also gives them an assertive edge to raise capital from additional sources.
Whether an entrepreneur decides to raise capital from traditional bank loans or from angel investors, new business owners will first have to impress them with their business plan. New business owners should be aware that despite the possibility of multiple rejections, they must not be discouraged and always keep a positive, professional attitude. If an entrepreneur strongly believes in their project, then they will seek any and all means to raise capital. If an investor or financial lender sees potential in an entrepreneur’s new business ideas, then they will strongly consider the opportunity to enable the new business owner to raise capital and provide funding for their new business endeavor.
Good credit vs. bad credit
Credit rating has become a very significant component when a new business owner decides to raise capital. This policy holds true for every financial lender: the higher the credit score, the lower the interest rates. If a new business owner has bad credit ratings, such as 600 and below, then they will most likely not be able to effectively raise capital since there is a high probability that their loan application will be denied. The entrepreneurs that seek to raise capital for their new business in large amounts and are planning to borrow this money from a bank should try to monitor their credit score and fix their credit history beforehand so that they can get new business loans at favorable rates. There is no doubt that a high credit score is a vital component to raise capital for a new business.
A few years ago, there were several financial institutions and banks with a scoring rank system that automatically determined the new business owner’s interest rates. However, nowadays, there are multiple credit rating agencies that diligently analyze the new business owner’s credit score before granting capital. For a new business to effectively raise capital, the new business owner must have a good credit rating.
Many entrepreneurs will agree that it is not an easy task to raise capital for their new business. The credit score agencies can easily determine the credit ratings of an entrepreneur simply by collecting information on the new business and analyzing the details, such as the borrower’s current income level, payment and debt history, and other important financial facts that may be useful in the process to raise capital. After credit agencies obtain a detailed report on the borrower, this information is sold to loan providing organizations, which further determine the amount of capital to be allocated. Whether an entrepreneur is seeking funding from a private investor or lending institution, their credit history will be investigated before they are able to raise capital for their new business.
There are many different funding options available to new business owners who are seeking to raise capital. However, before they resume their funding quest, new business owners should identify the different sources of capital and are encouraged to diligently work on meeting the required criteria. This includes ample industry research, the creation of an effective business plan, and credit report maintenance and repairs.
While personal savings and money from family and friends can be readily available, it may not be enough to raise capital. Instead, new business owners can raise capital from financial institutions, government grants, and even from angel investors and venture capitalists. A fast means by which new business owners can effectively raise capital is through online networks such as Go4Funding.com. As a member, new business owners can increase their chance to raise capital by posting their capital necessities online where it will be viewable by accredited investors from around the world. Many new and existing business owners have used Go4Funding.com as the main source to raise capital for their businesses while investors depend on Go4Funding.com for investment opportunities. If you are a new business owner who is seeking to raise capital or if you are an investor who is interested in different business prospects, visit Go4Funding.com and become a registered member today. The opportunities are endless.