Starting a Business Part 1 - Raising Capital
Owning/starting your own business can be a very beneficial venture. Owning your own business provides job security and control which is very appealing in today’s economy especially considering the lack of jobs and the previous downturn in the economy. But starting your own business isn’t simple; there is a certain complexity to either purchasing or creating a business. The very first thing you need to consider before starting the process is the capital you need to invest in the business. And even before you even begin to raise capital and you need to understand the total amount of capital you will need. Calculating this can be done by preparing a business plan.
A complete business plan will identify and quantify the capital total that is likely needed to be required to reach breakeven and beyond. Even if there is a minimal outlay for offices, equipment or employees the amount of capital needed before opening your doors for business is likely to be significant. By having a thorough business plan you can account for all these factors and have a specified amount of capital needed. Even though a business plan may seem tedious there are many benefits to preparing one, apart from calculating the capital total, they are;
- You will have a better understanding of your market and the competitors your will face
- Avoid mistakes that can be costly to the business
- Have an outlined goal plan which will provide structure in the strategic moves placed
- Have a long term plan which can aid in expansion in the future
- Lastly ‘No business can truly succeed without a business plan’
Now when calculating the capital needed it is recommended to account for all the worst case scenarios that could happen while building your business, account for the costs they can inflict. It is better to be prepared for the worst circumstances because it is virtually impossible to have too much money but having not enough that is when problems arise. Now that a total sum has been calculated you can concentrate on what source of capital is right for you and your business. A lot of research is recommended when doing so; as there are many resources for raising capital, some less complicated than others but some more beneficial than others.
Equity financing is usually achieved through investors; this is by pitching your business plan (another reason to have a plan prepared) to potential investors in which they will decide whether your business has the potential to succeed and whether they want to invest in your company. This is a good method of raising capital as you can have numerous investors which means more capital.
The disadvantage though of equity financing is that investors will own a certain percentage of the business; some investors may want partial or complete control of the business. Even some prefer to have a say in business decisions, sometimes including routine decisions.
Another method of equity financing is personal funding.This can also be referred to as ‘bootstrapping’. This can be obtained through the following;
- Personal checks
- Savings accounts
- Credit cards
- Retirement accounts
- Sale of vehicles, real estate, recreation equipment and sometimes rare collectibles.
‘Bootstrapping’ a business when you are not drawing a salary and where you are depleting any savings that you have is one of the most difficult things to do. It is not impossible but can be quite difficult and is usually the method with a higher risk value but is the simplest and usually the first type of financing entrepreneurs goes for.
Debt financing in other terms is a ‘loan’, this is generally offered by banks and accredited government agencies. In terms of banks they will assess your financial standing then approve a loan which you will owe with interest until the total is paid back. This is advantageous because the entrepreneur is able to retain complete control over the business. The disadvantage being that the loan may look unattractive to future investors if further capital is needed to be raised. There are two types of loans you should consider, decide which would be more beneficial to your needs.
A secured loan is where collateral is needed for the loan to be approved. Collateral can be in the form of commercial and residential properties, invoices or even recreational equipment. The reason for the collateral is because secured loans are very high in total.
This type of loan does not need collateral; this is because the total is a lot lower compared to secured loans. But this may be more compatible to your needs.
There are some state government agencies that occasionally offer discretionary incentive grants to businesses that, in the agencies’ opinion, help stimulate the state’s or region’s economy and advance beneficial causes. Government grants if possible to attain are the best source of funding as it is a non-repayable investment, as long as you use the money correctly the government does not expect it to be repaid.
SBA (Small Business Administration)
America also has a funding program referred to as ‘SBA’, Small Business Administration; you can receive government loans by the SBA. In the past 10 years the SBA has enabled almost 435,000 new businesses a total amount of more than 94.6 billion dollars. It is considered to be one of the leading resources for new business owners to raise capital.
When applying with the SBA you will need to meet a minimum criterion and provide them with the following details;
- Business profile
- Loan request amount
- Collateral details
- Business financial statements
- Personal financial statements
The requirements and minimum criteria can change over time because of changes in the government and the economy, it is best to have research directly from the SBA website if interested in their loans and programs.
The SBA provides a few different types of loans and programs to help different types of business for different needs. The first being guaranteed loans.
- Guaranteed Loans
The SBA does not particularly lend money directly to the new business but instead acts as a guarantor through a network of lending partners to help promote the start-up growth and success of small businesses. They create the guidelines of the loan and provide a guarantee that the loans will be paid which results in a lower risk value for the lending parties. The reason why the SBA is so beneficial is because it offers flexibility that other traditional loan providers don’t have.SBA though will not approve a loan to a small business if the borrower has access to other financing on reasonable terms; therefore they are enabling the business owners who are in real need of the capital/loan.
- Surety Bonds (bonding program)
SBA Surety Bond program helps small business contractors who cannot obtain surety bonds through regular commercial channels. But first what is a Surety bond? It is a three-party instrument between a surety (someone who agrees to be responsible for the debt or obligation of another), a contractor and a project owner. The agreements binds the contractor to comply with the terms and conditions of a contract and if that contractor is then unable to complete the requirement of the contract the Surety steps is and takes control of the responsibilitiesof the contractor.
SBA can guarantee bonds for contracts up to $5 million, covering bid, performance and payment bonds, and in some cases they can guarantee up to $10 million for certain contracts. This program strengthens a contractor’s ability to obtain bonding and allows for greater access to contracting opportunities for small businesses.
- Venture Capital Program
SBA’s small business investment company (SBIC) program is where the SBIC, with its sources of capital backing, search across the United States for promising businesses in need of debt or equity financing. SBIC’s are similar to other investment funds in terms of how they operate and their pursuit of high returns. However, unlike other funds, SBICs limit their investments to qualified small business concerns as defined by the SBA regulations.
There are many options when looking for opportunities to raise capital. There are two key steps that need to be involved in the total process, preparation and research. Preparation is in referral to the Business plan and pre prepared capital total and research is in reference to the research of different options of funding. If you are diligent with these then you will have minimal issues and can concentrate of creating an efficient and profitable business. Good Luck.