Every year, more and more entrepreneurs venture into business start-ups. As a result, they need to raise capital. The purpose of this essay is to discuss the types of capital available for entrepreneurs. Throughout the discussion, the entrepreneur is reminded to remember why he or she needs to raise capital and the importance of finding the right source to borrow it from. The difficulties and challenges faced in an attempt to raise capital are also mentioned. Finally, a conclusion is given.
Raising money to start a business can be hard. Yet, it is durable if you understand why the money is needed and where to look for it. Some of the reasons why capital is needed are to build clientele, hire employees, rent office space, purchase equipment, obtain licenses and insurances, meet challenges head-on and so forth (Inc, 2009). In order to accomplish these things, you can obtain the money by using personal funds, borrowing from family and friends, taking on partners, getting a loan from the bank, seeking government programs, acquiring it from angel investors, being creative, fundraising, or using credit cards (Inc, 2009).
A. Remember the rules to raising capital
There are rules the entrepreneur should know when pursuing capital. For example, know how much is needed.
Rule No.1: Take no more than you need.
Rule No. 2: Only if it’s cheap. Cash is cheap (Comaford-Lynch, 2007, How much do you need, para. 1).
Another example is to know when capital is needed.
Rule No. 1: Raise money before you need it.
Rule No. 2: You always need it sooner than you think (Comaford-Lynch, 2007, When do you need it?, para. 1).
Remember that bank loans take between two and three months to obtain. A Small Business Administration (SBA) loan can take up to four or six months to require. For an angel investment loan, the process can take between three and twelve months. If you are trying to acquire a grant from the government, well, that process can take up to one year. Thus, it is important to remember to try and begin raising capital six to nine months beforehand (Comaford-Lynch, 2007, When do you need it?, paras. 1-3).
Yet, a third example is to know who to borrow from.
Rule No. 1: Only take money from someone you like and respect.
Rule No. 2: I’m serious. You will be with your investor for two to seven years (Comaford-Lynch, 2007, From whom do you want it?, para. 1).
Thus, it is important to remember to find investors by conducting specific Internet searches. You can do so by using the Internet search engines such as Google, Yahoo, and MSN. Some of the topics you want to enter are “venture capital,” “micro loans,” “business loans,” or “angel investor,” (Comaford-Lynch, 2007, From whom do you want it?, para. 2).
Another important thing to remember about the person or entity you borrow money from is whether or not you want the money to be dynamic or submissive. Comaford-Lynch (2007) indicated,
Do you want “active” or “passive” money? Active money is from financiers who will work with you closely. They’ll add value by introducing you to sales prospects, influential people, and more. Passive money is just money, no connections, no additional value. (From whom do you want it?, para. 5)
The fourth rule is to know what comprises you will make.
Rule No. 1: Don’t be greedy.
Rule No. 2: But don’t be taken advantage of, either. If you’re seeking equity financing, you will be selling pieces of your company repeatedly (Comaford-Lynch, 2007, What comprises will you accept?, para. 1).
You do not want a diluted business which means it has very little value in it. However, if you keep selling equity into your company that is what occurs. Remember that the more control you keep (try to obtain at least 51% ownership of your establishment), the better off the company is in the long-run.
B. Raising capital has its difficulties
There are some downfalls to raising capital. During the process, something can go wrong with the paperwork. The investor can also decide not to allow you to borrow the money. As a result, an entrepreneur should understand that the process of obtaining capital is a difficult one. Thus, it is important to list the six factors that should be considered. According to Sugars (2007) of Entrepreneur.com, difficulties include the following:
Half-baked business plans
Focusing too much on the idea and too little on the management
Not asking for enough money
Having too many lenders or investors
Failing to get the proper legal agreements
Poor cash flow management (The 6 biggest mistakes in raising start-up capital).
As an entrepreneur, you want a solid business plan. In order to accomplish this goal, you can acquire help from SBA.gov (Sugars, 2007). There is a site that allows you to create your own business plan and monitor the process. It is called Minority Business Development Agency or MBDA.gov (2003) for short. The site is free to use. Yet, it requires you establishing a user account that includes creation of a member name and password. After that, you have access to the entire site at any time of the day or night. It is a very good site to use because the site details information about loans, government contracts, agencies that help entrepreneurs and small business owners and so forth. Not only that, it is a very effective site to build a business plan on. This is largely due to the fact that MBDA.gov (2003) lists examples of the types of business plans you may desire to create for yourself. The process is step-by-step and very detailed. It even shows you how to assemble the business plan and include financial statements which is very important when seeking a business loan (MBDA.gov, 2003).
However, you can also run an Internet search by plugging in the following “create business plan” on any search engine. In terms of the concept you want to acquire money for, just remember that the company has to be managed once the money is obtained. If you invest all your energy in the idea and not enough in the decision making processes that implement the idea, your business may fail (Sugars, 2007). That is why it is important to have the good business plan—because it details where every penny of your money will be spent. Always remember to include a miscellaneous or unexpected expenses section that accounts for an additional 3% to 10% of your entire budget. This should help you in making adjustments to expenses as the need may arise.
C. There will always be challenges to raising capital
As mentioned in previous sections, never get too much money or have too many investors. This takes away from the equity in your business. Equity is something that can be converted to working capital when you need it. Not only that, equity is ownership. This is your business. Please keep in mind the importance of retaining at least 51% ownership (Comaford-Lynch, 2007).
The entrepreneur should remember that there will be challenges to raising capital. Of course, this applies to anywhere in the world that an entrepreneur seeks to establish a business. For example, in Singapore, 90% start-ups reported a decline in sales and 10% reported order cancellations (DP Information Group, 2009). To resolve this issue, DP Information Group (2009) listed recommendations for both start-ups and lending institutions.
D. Recommendations for raising capital or lending it
Yes, there are ways to stay involved in the borrowing process. For start-ups, recommendations include to,
Actively encourage the adoption of information technology and infocomm solutions for growth;
Tap non-traditional services for funding; and
3. Enhance entrepreneurship competence through financial management, growth and sustainability plans (DP Information Group, 2009).
The recommendations for agencies, associations and financial institutions are to,
Intensify efforts to promote adoption of more IT and infocomm solutions among start-ups;
Innovative and new evaluation approaches to funding of start-ups; and
Introduce more start-up focused business assistance (DP Information Group, 2009).
Remember that raising capital requires patience. The entrepreneur should know the process is lengthy and at times, even stressful. As a result, as an entrepreneur who seeks to raise capital, you should remember to know your topic inside and out. In order to achieve this goal, you must have a full-proof business plan that details the reason why you need to raise capital and how the money will be spent.
As an entrepreneur, please remember that you have many possibilities when it comes to raising capital. You can go to those you know, lending institutions, or private investors. There are the options to raise your own funds or take on partners. You might even want to consider going into business as a corporation and allowing the general public to purchase shares in your business. Whatever decision you make, consider the need to do research and analysis first. In this case, you will have no regrets later.
Comaford-Lynch, C. (2007, January 22). Rules to raising capital. BusinessWeek: Small Business Financing. Retrieved May 4, 2009, from website: http://www.businessweek.com/smallbiz/content/jan2007/sb20070122_060956.htm?chan=smallbiz_smallbiz+index+page_today’s+top+stories
DP Information Group. (2009, March 26). Raising capital and manpower remain top 2 challenges for entrepreneurs though prominence has eased. Retrieved May 4, 2009, from website: http://www.dpgroup.com.sg/news/press/2009/doc/STEPS%20Press%20Release%202009%20FNL.pdf
Inc. (2009). Raising start-up capital. Inc: The Daily Resource for Entrepreneurs. Retrieved May 4, 2009, from website: http://www.inc.com/guides/finance/20797.html
MBDA.gov. (2003, December 30). Preparing your business plan. US Department of Commerce. Retrieved May 4, 2009, from website: http://www.mbda.gov/?section_id=5;bucket_id=127;content_id=2331;well=entire_page
Sugars, B. (2007, September 20). The 6 biggest mistakes in raising startup capital. Entreprenuer.com: Startup Basics. Retrieved May 4, 2009, from website: http://www.entrepreneur.com/startingabusiness/startupbasics/startupbasicscolumnistbradsugars/article184350.html