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How to Raise Money for Your Business
When you start out a small business, you'll need to figure out methods to raise money for your business. Since not having enough money is one of the biggest reasons small businesses fail, it is crucial that you set aside enough money to get you through the tough times as well as for the unexpected.
At the beginning phases of your small business, sources of money will be extremely limited. Although you may hear in the media that you can go to the bank to get a loan or sell stock in your company to raise money, in reality, at the earliest stages of your business, raising money by these methods can be very difficult.
Banks will usually not lend you any money until you have been in business with positive cash flow for 2-3 years. And selling stock maybe possible, but at the earliest stages of your business, you may have to undervalue your stock significantly to get any type of real money.
Many small business owners do start their business through the means of using credit cards, credit lines, home equity loans, personal savings, and/or borrowing money from friends or family.
To determine how much money you need to raise, create a thorough business plan that has a detailed start up costs and operational cash flow needed. The financial figures must include costs for rent, inventory, personnel, legal, administrative, and miscellaneous expenses. It is usually good to be conservative by overestimating how much you will need to survive in your business. Always use Murphy's Law when thinking about financials to keep you cautious and alert at all times.
Here are some sayings from the Murphy's Law courtesy of Wikipedia. Try to embrace some of these quotes because in business Murphy's Law happens.
- "Things will go wrong in any given situation, if you give them a chance."
- "If there's more than one possible outcome of a job or task, and one of those outcomes will result in disaster or an undesirable consequence, then somebody will do it that way."
- "Whatever can go wrong, will go wrong"
- "Whatever can go wrong will go wrong, and at the worst possible time, in the worst possible way"
- "Anything that can go wrong, will,"
- "If anything can go wrong, it will, and usually at the most inopportune moment"
- "Anything that can go wrong, will-at the worst possible moment"
Murphy's Law is a nice guideline to use for estimating financials. Keep this in mind to avoid any unexpected turns in your business. It will help you to keep yourself safe from running out of money.
Finding the Money
Once, you have the total figure you need for start up and operating your business smoothly, it will become time to go find the money for you to use. There are all sorts of creative financing methods you can use to try to obtain financing for your business. Here's a brief description and some advice of your realistic sources of financing when you are starting out.
Credit cards are like an entrepreneur's best friend, if you use it right. By maintaining several cards, it can provide you with instant cash, and you can easily have a credit of $10,000-$50,000. The credit cards can be used for both personal and business expenses you will incur.
When you are starting out, one of the biggest challenges of entrepreneurship is making the ends meet of your personal life. Since you won't be getting a regular paycheck each month, you will need to manage your personal cash flow in order for you to keep paying your rent, your bills, and to put food on the table. Credit cards can help you with all that if properly used.
Once in business, you can start to apply for credit cards in your business' name. They will be personally guaranteed by you, so if you are the sole owner, you can use them for either personal or business expenses.. Credit cards that you create with your business tend to give you a higher credit limit thereby giving you additional security.
To use your credit cards wisely, take advantage of the 0% balance transfer offers when you open new accounts. If you have a balance outstanding on other cards, a 0% transfer is like free money each month. Getting approved for a $10,000 credit limit with a 0% balance transfer offer will mean that you can save about $150 per month in interest expense. That is a good chunk of money to save each month.
Another advice we have is to take advantage of some of the rewards programs available. When you run a business, you'll have a lot of fixed expenses that you have to pay each month. If you set up automatic payments for each these recurring payment, you can rack up a lot of rewards really fast. The rewards can help you pay for your business meals, buy books on Amazon.com, or go on that vacation you always dreamed about.
For a small business, American Express is known to be very generous in giving you credit at start up phases. Bank of America, MasterCard, Chase, Advanta, and Discovery are also famous small business credit cards. Always ask the bank that you have your checking account at for a credit card as well. For other recommendations, do a Google search under "small business credit card" and you should find a website that will recommend the best small business credit cards.
You may or may not get approved for a credit line from the beginning, but you can sure try to get one. Basically a credit line works very similar to credit cards, but with an ability to write a check like you are writing it from your checking account. The check that you write will become a balance on your credit line, and you can choose to pay the entire amount or not. Credit lines can be used to pay big ticket items like rent, inventory, and possibly payroll.
Credit lines become a very useful cash flow management tool, and it is especially useful for the cellular phone business. All major banks will have a credit line program for small businesses, and will usually base your credit amount on a percentage (usually 10%-20%) of your annual revenue figure. The annual percentage rate on a credit line is similar to that of a credit card, so they are not exactly cheap, but it is much better than a cash advance from a credit card.
Home Equity Loans
With the recent sub-prime crisis, the environment of home equity loans may have changed a bit. However, traditionally, people have used home equity loans to obtain financing to start their own businesses. It is a good source of financing due to the fact that it does have favorable tax treatments. However, understand that you are putting your home and the lives of your family at risk when taking out a home equity loan. Although it may be a good source of financing, we do recommend looking into the alternatives before tapping into the equity of your home. This is out of experience since we've seen entrepreneurs use home equity loans to end up losing it all for themselves and their family.
Personal saving is the most conservative, and theoretically the best place of financing available. If your business succeeds, all of the company's success can be attributed to yourself, instead of sharing it with your partners. If you fail, nobody except for you is hurt.
Personal savings is a good place to look for financing. Of course, one issue that many entrepreneurs have is that they don't want to use personal saving because they may have been saving money for a down payment on a home or other reasons. Or for many entrepreneurs, they simply don't have any saved up. Understand your situation, and figure out how much of your personal savings you can use to start out your own business.
Selling or Contributing Personal Property
When you are starting out a business, you can contribute property other than cash into your business. This maybe your car, office furniture, office supplies, or other materials that is of value for the business to use. Be sure to talk with a CPA on this issue as it does involve proper recording for accounting and tax purposes.
You can also generate cash for your business by selling personal assets you have on eBay or Craigslist. Using these services will allow you to turn assets into cash in 7 days. You may need to sell your assets for a bargain, but that doesn't mean that you can't sell items that's been sitting around the garage for years. Personally, we've sold items on eBay and Craigslist that we've never used in our daily life, and it was almost going to Goodwill for a donation. We were pleasantly surprised to see many of the things that we thought were "trash" sold for $10, $50, and over $250! We are sure you can also dig up that old computer, monitor, or anything around the house that you don't use to be sold on eBay or Craigslist. You will be pleasantly surprised to see what will sell on these sites to generate cash for your business.
Selling Stock of Your Company
Selling shares of your company is possible to raise money for your business. We have used this method in raising both money as well as managers & key employees for the company. It is a great way to bring in cash as well as people into your organization.
Selling stock of your company can be easier than you think. We were a California corporation, and for a small business, California has an exemption where we are allowed to issue shares using an exemption that makes it extremely easy and convenient to issue shares. Basically, what you do is value your entire company, divide that value by the amount of shares you'll have outstanding, and price it. You'll then need to convice your potential investors that the price of the stock are really worth what you present them with. Once the negotiation is settled, you file a one page paperwork electronically with the California Department of Corporation, and that's really it. It can be really easy.
Of course, on the flip side, since security law is a great place where fraud can occur, it is heavily regulated if you step just a tad away from the exemptions available. If you do one thing wrong, you may be stripped away of the exemption. So we recommend you go talk to a lawyer before selling shares of your company to potential investors or employees to avoid any problems later. These kinds of offerings are called limited offerings, private placements, or direct public offering. Basically, they are small scale IPO methods for small business. Use these keywords to search on Google for more info.
Selling stock of your own company does provide you with the opportunity to grow your company at a rapid pace. Of course, at the same time, you'll have more stakeholders in your company, so there will be more pain that you'll have to deal with. By selling shares, you may not be able to decide on major moves of the company, or even worse be booted out. Some of the best small businesses out there are one-man or one owner businesses. You just have a lot more freedom that way, and if you can keep it that way, you really should.
Borrowing Money from Friends or Family
One common source of financing is to borrow money from friends and family. Borrowing money from friends and family does not mean that you do not need to pay interest on the loan. You will need to structure it properly by paying an interest rate and signing a promissory note.
To make the offer appealing to the friend or family, you can offer them a convertible note or a convertible preferred stock to them. This will mean that you will make monthly or scheduled payments of interest and/or principal, but the lender has the option of converting it to a share of common stock at a later point in time for a given price. A convertible note or a convertible preferred stock is usually very appealing to both friends and family since they have the option to get a piece of your company later.
Talk to a lawyer or a CPA when borrowing money from these sources using the methods described above. You don't want to take advantage of them since they are your family and friends.
Angel Investor or Venture Capital
Contrary to public knowledge it is extremely rare and difficult to obtain financing from an angel or venture capital. Most of them will never give up seed money to start out your business. You will need to find the initial seed money using your own sources like every other entrepreneur out there. Angel or a venture capital funding will come at a later point in your business when it has reached a point that is somewhat established, and can provide the investors with a significant return on investment.
When obtaining financing from an angel or a venture capital firm, you can expect to lose at least 20-30% ownership stake of your company in return for their investment. These organizations will also expect you to get them a return of investment of about 20-40% annualized return within a five year period. You can disregard these types of financing as you are starting out since they will not fund your business. Just be positive, and use the methods above to raise the initial seed money to start out your business. When the time is right, you may be able to obtain funding from an angel or a venture capital firm.
So here are some methods of raising money for your small business. Please feel free to comment on your unique way of raising money for your small business!