The basic business principle which states that ‘it requires money to make more money’ becomes all the more vivid for persons contemplating about starting their own small business ventures. Raising the money or capital required for this endeavour is a most basic requirement. The stark reality of this task is that it is no walk in the park – at least for the majority of people who have limited financial resources of their own to summon.
Though lots of venture capital funds are in circulation, a perception that is incessantly sustained by the financial media, it is most difficult for start-ups to access the same. Most potential small business owners are hampered by the fact that they lack the winning business ideas and plans that can attract the investments of the moneyed backers they know of. For other potential entrepreneurs it is the vice versa. They hardly know of anyone who can back them financially though they have superb business ideas. For such people it is a double predicament – they cannot start off on their own and they are also not sure of the right persons to disclose their ideas to.
Rather than letting these realities subdue their business ambitions, potential entrepreneurs should make personal initiatives to source for the required capital. Starting a small business has never been easy, but numerous people with the resolve to succeed have done it – some have exceeded all expectations and are now business moguls in their own right. In the context of this article it is worth noting that the term ‘small business’ is subjective and depends on factors like, the required amount of capital and the industry involved.
Raising money for business l is not all about visiting the local bank – there are a host of other options that can be explored. These include:
1Raising Business Capital From Individual Savings
All these are feasible options that will make external fund sourcing unnecessary – they however don’t apply for all, more so young entrepreneurs who have little or nothing in their financial portfolios.
2Borrowing Capital From Family and Friends (F&F Borrowing)
This is perhaps the best financial lifeline for young entrepreneurs whose start-up capital requirements are quite small. Borrowing money from family and friends is a most convenient alternative because the otherwise serious issue of repayment is mostly agreed upon amicably, often without the setting of too rigid time-frames.
Though this is the case, it is only apt that the borrower treats the funding agreement with the requisite business formality. As much as possible, one should try to repay the funding within the said time period, though one can also opt to do the same via a sharing of the profits thus accrued.
3The Banks
Banks remain the preferred financial institutions of choice for people seeking to raise money for business start-ups. This is, however, the case for already established businesses and not start-ups. The former can get the requisite funding upon raising a third of the total capital requirements, while the latter usually need to raise half the total funding themselves. Some banks do not consider start-up businesses at all.
Prior to approaching a bank for funding, borrowers are required to prepare a comprehensive business plan with details of their projected cash-flows and enumerations of how they will repay the loan amount inclusive of interest.
4Courting Angel Investors
Angel investors can be described as financially sound persons who have the knack of identifying potentially successful business ideas and funding these substantially with an aim to getting a considerable chunk of equity ownership. Angels are mostly successful professionals known to the entrepreneur and for this reason they tend to be considerate, though not as much as family and friends will be. Their professional experience and market exposure make them sound advisors and as such they are known to mentor the green entrepreneurs – a most welcome advantage indeed for start-up businesses.
To court an angel investor, the entrepreneur-to-be has to have an innate understanding of the planned business venture so as to be in a position to clearly explain the intricacies involved. This definitely requires preparing a business plan or prospectus which the angel investor can peruse through and offer corrections and suggestions as required.
5Seeking Venture Capitalists
Venture capitalists differ from angel investors in that they are in the business or profession of identifying the right start-up ventures to invest their funds in. These investors have access to large quantities of capital and they are thus most interested in business start-ups whose capital requirements are considerably huge. The businesses they choose to fund are considered to have great growth and profit-making potentials within a short time-frame. The funding structures they offer see them get a substantial control of the business. This stake is exchanged for up to 40 percent of the business returns upon their exit, which does not normally go beyond seven years.
6Development Commissions and Business Investment Companies
Business Development Commissions and Small Business Investment Companies work in almost a similar manner. They basically identify new small business ideas that they consider to have good performance potentials and then lend money to the same. The small business repays the amount in a defined time period. Alternatively, the funders get a small stake in the business, which is mostly the case when small business investment companies are involved.
7Some Alternative Ideas
Other means through which to raise money to start a new business venture, involve the use of silent partners, mergers with already established firms in the same industry, and the use of money brokers, though this requires prudency in light of the fact that some who offer this service can’t be trusted.
