Most people have never raised funds before, and even with all the advice out there it’s still a scary thing for many. But this feeling can be overcome.
If you are to raise capital from others, it is extremely important that you have a clear vision and a carefully thought-out business plan that can be marketed---like what’s hot right now, which can meet customers’ needs or generate demands. Or better still, if you can show that you have had some successful business ventures in the past, there’s a very good chance others will be willing to loan you money. Investors, for example, like to work with proven winners, and will often invest in entrepreneurs who have previously made money. Or even if you don’t have any past business success, can you provide some evidence that your new business has started and is getting orders from customers? This is called market traction. If you can do this, then finding investors or lenders won’t be that hard---that is, you can more easily be on your way to raise a significant capital to scale up your business venture. Otherwise, it’s best to wait the launch until you have at least something to show.
There are so many ways of raising capital, but the most common ones are as follows:
Using Your Own Money for Your Own Business: Many successful entrepreneurs put nearly all their savings to start their small business, because they are fully committed and deadly serious about what they want to do. This is what catches the attention of lenders and investors. Conversely, if someone is not willing to invest in his or her own business, how can anyone else be expected to? So, the first place to raise capital starts with you.
Loans through Family and Friends: These are loans that you approach a family or a friend for---you ask for a certain amount of money with a promise to pay them back in the future. Of course, you may initially feel a bit nervous that it may sound like you’re begging or put your loved ones in an awkward position. But if you present your pitch professionally and treat them like real investors (because they are), it will most likely go smoothly even if you are turned down, which will sometimes happen because of some hardships in their lives. But invariably, they will all want to see you succeed. In some cases, these people could charge you a certain percentage of interest or could say to just return the same amount loaned. The downside to this kind of loan, though, is that personal relationships could be affected especially if you fail to pay them back on time.
Rotating Contributions in the Form of a Credit Union: This is a way of raising capital from within a group. The way this works is that five or more people would choose to bind themselves in an honor system for which each member would contribute money, say Rs.50,000. On a yearly basis and on a specific date, let’s say April 10 of every year, everyone in this group would be required to bring his share of the money. No excuses and no game playing. Once the Treasurer receives the money on the 10th, the Treasurer would then immediately disperse the funds to one person. The lump sum amount would be very helpful in carrying out the venture that you need the money for.
Loans through Financial Institutions: These are commercial loans that banks and other financial institutions grant to individuals or businesses. In order to determine your eligibility, these institutions would normally require you to produce proof of all your outstanding debts, available assets, balance sheet, income statement, etc… so that they can make an analysis of your cash flow or debt-to-income ratio. Very importantly they look at your credit worthiness to determine whether or not you have a track record of paying your debts on time and if you can be really trusted with their money. An analysis of these items could provide a basis for your loan application to be approved or denied.
Government Loans: These are absolutely the best to get because of all the benefits they offer. First, they offer very reasonable terms and very low interest rates. Second, government loans are generally more lenient to obtain than commercial loans, because government loans are usually granted as a way to help the marginalized or the most deserving.
Funding from Angel Investors: When you need funding for business start-up or for business expansion, angel investors can seem like a God-send. However, raising money from angel investors isn’t as easy, or as simple, as it might seem, because angel investors are not average investors. They are highly successful entrepreneurs or business owners who are often willing to take more risk than most, in addition to investing huge amount of their money and also bringing you valuable industry experience, executive knowledge, creative ideas, and contacts. But to be able to attract them, you must build a convincing case: a well thought-out business plan with a product that can meet a must-have need. Also, you must be able to clearly explain how your product has a clear competitive advantage over other similar products in the market.
No doubt, there are certain disadvantages to borrowing or taking loan. But as long as your borrowing can serve as a means to anend, its use can be justified … because you can certainly use others’ money to make a lot more money by financing your business, while paying others back in full from the business proceeds.
