How to Raise Money for a Small Business
One of the keys to a successful business start-up and later
expansion is your ability to obtain and secure appropriate
financing. Raising capital is the most basic of all business
activities, but as many new entrepreneurs quickly discover,
raising capital may not be easy; in fact, it can be a complex
and frustrating process. However, if you are informed and have
planned effectively, raising money for your business will not
be a painful experience.
There is one simple piece of advice – borrow as little
as possible. Do not take extra money just because you can and
do not take money you do not find. Once you work out how much
you need, try and reduce it, and then try again. Why?
Because you have to pay it back.
Forget all the stories you hear about so-and-so who has been
bankrupt many times and still has a big house. Forget about
trying to con a bank, a lender anyone. There are many, many
more people than you could believe who hide their debts with
spending money – and eventually it all falls apart. That
is a fact, insolvency practioners by law are not allowed to
reveal who they are acting for in an administration but I will
guarantee that someone in your street, a large business near
you and many, many smaller ones are in administration. That
is a fact.
There are several sources to consider when looking for financing.
It is important to explore all of your options before making
a decision.
Personal savings: The primary source of capital for most new
businesses comes from savings and other forms of personal resources.
While credit cards are often used to finance business needs,
there may be better options available, even for very small
loans.
A major word of caution – the re-mortgage. So many people
start by re-mortgaging to take advantage of the increase in
their equity value, it is free money.
Unless you are going to manage a business properly stay with
your job, a re-mortgage leaves you financially exposed and
without a job if you run the business badly, you now have a
bigger mortgage.
If you have equity in your property, wait. Get the business
running well with a small amount of finance and then re-mortgage – what
a difference that makes.
Friends and relatives: Many entrepreneurs look to private
sources such as friends and family when starting out in a business
venture. Often, money is loaned interest-free or at a low interest
rate, which can be beneficial when getting started. If you
borrow from a friend or relative, in my experience you will
pay it back. Of course there are horror stories, of course
you know someone who ripped off a friend or relative, in my
experience it normally gets sorted out eventually.
There is another advantage in that you will not borrow much,
and you will plan better. Take a small loan, plan well and
then release your own equity to pay your friend or relative
back – I cannot tell you enough about how often this
works.
Banks and credit unions: The most common source of funding.
Banks and credit unions, will provide a loan if you can show
that your business proposal is sound. By using one of our templates
you are using a sound successful system. Replace the wording
with your details, and you will have a plan that will work,
dare them to say no.
Remember, just because they um and ah they may not be no,
remember as well there is more than one bank. You have a plan;
it will cost you nothing to tout it around. Also most consultants
will say “don’t tout it around it looks like begging,
I’ll sort it with a mate of mine” – ignore
them, my experience is that there are few “mates” who
will lend to you because their “mate” is your “mate”.
Do it yourself.
Venture capital firms: These firms help expanding companies
grow in exchange for equity or partial ownership, but unless
you want a six-figure sum they are usually not interested.
We offer a service which will investigate who it is best to
send your plan to, if you do not want to do the research yourself,
use our service.
It is often said that small business people have a difficult
time borrowing money.
This is not necessarily true.
Banks make money by lending money. However, the inexperience
of many small business owners in financial matters often prompts
banks to deny loan requests. Requesting a loan when you are
not properly prepared sends a signal to your lender. That message
is: “High Risk!” To be successful in obtaining
a loan, you must be prepared and organized. You must know exactly
how much money you need, why you need it, and how you will
pay it back. You must be able to convince your lender that
you are a good credit risk.
These are the types of Business Loans;
Short-Term Loans. Terms of loans may vary from lender to lender,
but there are two basic types of loans: short-term and long-term.
Generally, a short-term loan has a maturity of up to one year.
They include working-capital loans, accounts-receivable loans
and lines of credit.
Long-term loans have maturities greater than one year but
usually less than seven years. Real estate and equipment loans
may have maturities of up to 25 years. Long-term loans are
used for major business expenses such as purchasing real estate
and facilities, construction, durable equipment, furniture
and fixtures, vehicles, etc.
Invoice Discounting is by far the most under-utilised and
by far the best route to get your early finances sorted out.
We have clients who receive about £5,000 a month from
discounters and it is an excellent method of building your
experience. It is also our experience that the people who come
to see you from discounters are more astute in understanding
the needs of small businesses than banks. Banks are security
dominated, if you have something to secure the loan against
you have a great chance that has nothing to do with whether
your business, or you, should receive finance.
Approval of your loan request depends on how well you present
yourself, your business and your financial needs to a lender.
Remember, lenders want to make loans, but they must make loans
they know will be repaid. The best way to improve your chances
of obtaining a loan is to prepare a written proposal.
When reviewing a loan request, the bank official is primarily
concerned about repayment. To help determine this, many loan
officers will order a copy of your business credit report from
a credit-reporting agency. Therefore, you should work with
these agencies to help them present an accurate picture of
your business.
Using the credit report and the information you have provided,
the lending officer will consider the following issues:
§ Have you invested savings or personal equity in your
business totalling at least 25 percent to 50 percent of the
loan you are requesting? (Remember, a lender or investor is
unlikely to finance 100 percent of your business.)
§ Do you have a sound record of credit-worthiness as indicated
by your credit report, work history and letters of recommendation?
This is very important.
§ Do you have sufficient experience and training to operate
a successful business? Have you prepared a loan proposal, and
business plan, that demonstrates your understanding of and commitment
to the success of the business?
§ Does the business have sufficient cash flow to make the
monthly payments on the amount of the loan request?
If you have a good credit history, if you can demonstrate
a personal financial commitment and if you have invoice discounting
in place, there is no reason to think you will not get financed,
do not take no for an answer, find a bank that says yes.
| 
