The ABC Of Raising Finance For Your Business

 

There is no doubt that human beings can come up with creative business ideas in little time. Yet, having these ideas is not enough to get a business running. A wonderful business idea needs a good plan to stand out. A good plan also needs enough finance to get done. Most times, a lot of people end up sharing their business ideas. they share these with their friends and family who contribute only emotional support. Emotional supports are great but sometimes, they are not necessary. In cases where a business startup is a major aim, money is what is needed. There are other times friends buy into such business ideas. when this happens, they help the business owner save up money for business start-ups.

A lot of excitement and anxiety are most times seen while kick-starting a business. This feeling sometimes misleads the bearer. when people are misled they tend to do things the wrong way. this is exactly what happens to a business owner when he or she allows the excitement to take over his or her mind. Anxiety can also make an entrepreneur do things without proper planning. The wrong direction in business plans destroys a good business idea. A wrong starting in business tends to weaken the foundation of the business later. They fail to realize that funds are a great part of running a business.

 A good product and service out in the market will make no progress without the right funds. For the sustenance of goods and services, funds are necessary. Most rush in with the startup with the hope of finding investors in the long run. Nonetheless, a good business idea needs a great support group.

There are times only a support group is enough to pull in startup capital. The business owner shares his ideas with his friends and family. When they buy into this idea, they bring in part of the fund to start up the business. If the entrepreneur has standby customers at this stage, he or she may decide to expand his business. A business idea that is planned and executed in the right way tends to pull in customers. And thus increase the chances of such a product getting seen in the marketplace. The business starts bringing in a good turnover when it builds a line of customers. And much later could stand out for initial public offering (IPO).

Sadly, this sort of occurrence only happens in the dream. In the actual business world, it is difficult to start up a business. The real-life situation is terrible, erratic, frightening. It is most times filled with a whole lot of revelations.

The concept of finance is extremely important for a business. Businesses globally are recognizing this fact. They are now moving towards setting up an enterprise for easier access to funds. The emphasis on this impression has now become more glaring than the idea of making money itself. The idea of raising funds is now the first to be attended to during business planning.

Some successful entrepreneurs have narrated their success in the business start-up journey. Their testimonies always encouraging other entrepreneurs to start out small. It is important not to forget that business startups are dependent on finance. According to a study carried out, the success of a business depends on external funding. External finance helps to move a business without stress. It also helps to make sure every part of the business is flourishing as should.

Raising capital for a business is the most important part of starting up a business. Most people assume that this part of the business does not need much attention. This mindset should need to stop immediately. Raising business capitals is not as easy as some have made it feel. There is a great chance that the success of a business depends mostly on external funding.

It is also good to recognize that a good startup fund does not guarantee success in business. Most entrepreneurs relax after startup without working towards maintaining the business. This is a global problem that has killed a lot of upcoming businesses. And had left some entrepreneurs lazy and without passion. Some many great business ideas had died at startup because of this. The bulk of running a business is not only about raising the startup fund.

Other entrepreneurs have made the idea of raising a startup fund seem impossible. This has discouraged upcoming entrepreneurs from trying.

This article will explain more about the idea of raising startup capital. It will also make it look less unattainable. It will also discuss other sources of raising funds for entrepreneurs. Lights are shed on the best mode of approach and also the necessary business capital.

What is startup capital and how is it raised?

It is a proven fact that every business comes with expenditures. These expenses are mandatory for settlement. A business needs funds, assets, or investments to kick start. The notion behind growing a business is basically to regain funds invested. And then to make a profit on the funds invested. When funds are not enough to start up a business, there is a great possibility of the business not kicking off. Entrepreneurs raise funds outside the business so it can startup without further delay. These funds could be in the form of partnerships and loans from friends and families. Some other form of generating fund is by selling some of the business shares to whoever desires.

The above explanation is basically what raising startup capital entails. It could further be broken down to mean to borrow from outside sources. The raised funds help with the startup, running, and maintenance of a business.

The Mechanism of Startup Capital

The previous subtopic dealt with forms in which startup capitals could be raised. The ways to raise capital are mainly through equity and debt.

Debt in this context of this article could stand for money borrowed. These funds are from banks at some agreed conditions. It can also be from friends and families. Debts are repaid most times with the attached interests and at an agreed time. There is an evident difficulty encountered most times using this form. This method of funding demands a full percentage of the risk of the entrepreneur. Such a one has an obligation to pay back the borrowed money on the agreed terms. Most times, these terms are not very suitable for the new business. Most times, financial institutes do not give loans to new businesses. This can be a big problem for many businesses in the startup stage. Financial institutions usually take a chance already established business when giving out loans. If a new business ever succeeds in getting a loan, it is most times very difficult. This, in turn, makes the ability to get a loan during startup to be near-impossible.

Most entrepreneurs offer the shares of their companies to outsiders. This they do to reduce the difficulty that comes with raising startup funds. They go all out and offer some shares or part ownership of the upcoming business in return for money. Capitalists then take those shares and give such a business owner money. The great thing about giving part ownership of the business is, the money lent is not paid back. Normally, an investor or capitalist waits for the fund invested to yield some profit at least. A capitalist may decide some years after a business startup to cash out his asset. This achieved when the shares are given back to the business owner in return for its current value. Also, with the approval of the entrepreneur, the investor can share his shares outside.

The point where the capitalist or investor sells all his part ownership is known as the ‘exit’ in business. This period only comes when the worth of the share becomes higher than what it was during the startup.

The explanation so far is basically how raising capital to start up a business works. Though it is not so detailed as it should have been. The article will reveal other options an entrepreneur can use to raise funds.

Other Ways to Raise Startup Capital

Bootstrapping

This is a method whereby the entrepreneur saves funds from scratch for the entire running of the business. He may not go out to get loans or sell the shares of his business in this case. The business owners in this option save up the entire cost for effectively running his business on his own. The great news about this method is, there is no limit to what a business owner can save. And this option is opened to every business owner.

Notwithstanding, many business owners during this stage in business can actually reach out to other people for help. In most cases, the closed circle of friends and family are the best options for help. This doesn’t mean it is no longer bootstrapping. Most times, borrowing comes with a lot of risks. Involving family and friends does not necessarily mean trying to spread the risk. This is done because friends are family are not so tough on entrepreneurs on debt repay. They can easily understand when a business is not moving exponentially as expected. And other times they may end up forgiving the loans when nothing works out.

Bootstrapping was till recently, the most efficient way of raising capital for a business startup. It is also one of the easiest ways to go. However, it is a tough deal most times and not normally an easy way to go. With bootstrapping, sacrifices are expected to be made. Most times other personal gains are given up and the money saved. Entrepreneurs take total charge of their business when funds are raised through bootstrapping.

However, the bad news is, the entire risk is on the business owner and other times his teams as well. Entrepreneurs may also use their personal savings during bootstrapping. And most times very difficult for the person to readjust to other expenses. The amount saved up for startup also determines how fast the business grows. And this most times can hinder the development and sales of goods and services in the business.

As explained earlier, with bootstrapping comes a lot of sacrifices. There are also a lot of other conciliations attached. Nonetheless, there are no sales of shares or part ownership involved. In this method, the business owner depends solely on his savings. Since that is the case, the entrepreneur gets to own the entire business. This reduces the stress of the entrepreneur in running a debt-free business. This channels the entrepreneur’s energy in developing products and services. The entrepreneur is not bothered about external funding in this startup option. This no need to borrow money in this method. Due to this fact, the expenditures that come with equality and interests get cut down. Other times, they do not exist. This will, in turn, help the business owner grow positive cash flow and the business in a short time.

Putting all the listed factors into consideration, there is a great for some business to do well only on bootstrapping funds. Businesses into service offerings are known to do well with this sort of fund.

Detailed research has it that most Indian businesses started off on bootstrapping funds. These companies have in recent times recorded a lot of successes irrespective of their beginning.

Advantages Of Bootstrapping	Disadvantages Of Bootstrapping
Thorough control	Great risk
Total business ownership	Great chances of using up savings
Widely focused on product development	Higher chances of growth and pace being hindered
Little budget	Constrains product development
Advanced chance of success	Compromise & detriments

 

Debt

As strange as this sounds, debt is an option for capital raising. It is actually an attractive opportunity for many business owners. Attractive in the sense that such an entrepreneur gets all the needed funds for a startup. This fund is handed over to them without as much as a struggle. Entrepreneurs get absolute control of their business while having the needed fund.

This option is the second most inborn opening for every business owner. In this option, an entrepreneur borrows money from a financial institution to fund his startup. The money is later repaid with interest at an agreed time. Most entrepreneurs go for this option because it also allows then to have control over their business. In addition to the control they have over the business, they also get the needed funds. Loans are mostly used in taking care of short term needs in the business. These short term needs could be startup capital. and also staff payment, and any other arising temporary need.

However, getting a loan from financial institutions most times is not a simple job. With tons of documentations and contracts to read through and sign, most entrepreneur ends up dropping the idea. Another discouraging point to borrowing from banks is the fact that the conditions attached are adhered to strictly. The period given for loans to be repaid is mostly never revisited or readjusted in times of arising problems. There is also an increase in the business cash inflow during loan repayments. Other parts of the business that may need funding are most times kept on hold while trying to repay a loan. And this in turn affects the business negatively.

It is therefore advised that when going into a loan, an entrepreneur most be certain of what he or she is getting in to. The business owner needs to calculate possible outcomes of repaying loans and crosscheck if his business can float while paying back. No doubt, a loan can effectively start up a business, fund the daily expenses, grow the business amongst many things. It is however very important to be certain at what stage loans should be incurred in a business to avoid the business getting liquidated in the long run.

Credit cards

Credit cards are an unlimited instrument for building the entrepreneur’s credit history. A new business would have a difficult time getting assistance from a local bank. This is because before a bank would process a loan, it would naturally request for futuristic sales plans and certain track records to check eligibility. It takes a lot of time for a business to get to the point where it can easily access loans from the banks. This is the reason why credit cards are the next best bet for funding.

As much as a business credit card is very important, an entrepreneur can also start out with his or her own credit card. Credit cards also have other advantages of added creating a reward point. This advantage is an addition to its ability to help a business owner easily access startup funds and grow eligibility. Fortunately, when a credit card is adequately used, it can positively build the entrepreneur’s credit scores and credit history.

Sadly, though, credit cards are widely known for their overrated interest rates. These rates could go as high as 40 percent. And this in turn can result in making a mountain out of a mole-hill of debt. Over time, past entrepreneurs have complained bitterly of the inability to get out of the financial troubles accumulated by credit cards.

A survey carried out among some business owners that used credit cards revealed that credit cards have turned out to be a dicey slant. And a lot of entrepreneurs now regard this form of funding, a trap to their business. It is therefore recommended that when getting involved with credit cards, the amount that could be comfortably repaid should be taken. This is advised in order to allow business owners to pay back on time and in full.

 

Advantages Of Credit cards	Disadvantages Of Credit cards
Allows you to enjoy in a laidback condition	High-interest charges
Fast and easy access	Extraordinary annual fees
Rewards and incentives	Might upset private credit score
Helps in constructing a credit history

 

Bank Loans

A detailed business plan is one of the first conditions to get a loan from the bank. As discussed earlier, getting a bank loan can be very difficult. However, a bank loan is a safer means of funding. This is because they offer reliable and flexible conditions for businesses. It is the most reliable way to get funds for the necessary spending starting a business can demand.

It is important to note that this is not the same as a credit card application. A bank loan comes with so many paper works. Nevertheless, the main thing a bank would look for during startup is an attractive business plan. Included in the business plan should be the funds needed for startup. It should also detail the manner in which the funds would be used. The current financial strength of the company should be listed in plain white. And also, an achievable return on investment should end the plan.

There are different types of loans that an entrepreneur could go for. This article has discussed a good number of these kinds of loans.

Term loans: this is a precise loan for an exact period. It is usually repaid through EMIs

Asset-based loans: in this type of loan, an entrepreneur gives out an asset in exchange for money. These assets could be land, gold, house, etc.

Invoice discounting: this kind of loan is usually given in exchange for wages. The bank gives out this loan to salaried job workers. The loan is given in return that unpaid invoices, promissory notes, etc. would go to the bank once released.

Purchase order financing: This is a type of loan given to achieve bulky purchase orders.

Working capital loan: this is a loan given to fund short term expenditures. It is also given during cash shortage.

 

Advantages Of Bank Loans	Disadvantages Of Bank Loans
Lower interest rates	It takes a lot of time to get processed
Tax assistances	Slim chance of succeeding
Numerous possibilities	The danger of losing the indemnity
Full control of a business	Track record is necessary for qualifying

 

Line of Credit

Line of credit makes use of traditional lending methods. It is an easy way of solving immediate money problems.

An instance could be thus. An entrepreneur may come into a problem with his or her startup funds. The business owner may need up to Rs 20,000. The startup chores may spread out through a period of three months. And the spending to be made during this period is needed in bits and pieces. Taking into consideration the length of time taken to process a single loan, an entrepreneur may decide to take the entire loan in one application. So, instead of taking three different loans that would sum up to Rs 20,000; he or she goes for the entire amount. The bank, sadly will charge and interest for entire money regardless of how it is taken.

This is a consistent problem with traditional lending methods. And this is where the line of credit becomes desirable.

There is no need to utilize the entire amount borrowed in Line of credit. Part of the money borrowed can be used while the rest left. One of the advantages of using the Line of credit is the no interest on the amount not in use. The money left in the bank has no interest in it unlike the loan from banks. In the line of credit, however, interest is only applied to the money utilized.

The same instant as used before; a startup of Rs 20,000 needed over a period of three months. In a situation an entrepreneur is to use Rs 5,000 from the total amount need, an interest on the Rs 5,000 will be charged to the account. The remaining Rs 15,000 will be available in the account without an interest applied. This implies an entrepreneur can spend a lot less on interests on Line of credit source of fund.

There are many traditional banks that offer this service. There are also some online companies that offer such services too.

 

Advantages Of Line of Credit	Disadvantages Of Line of Credit
Not rigid	Maintenance Charges
Reduced interest to be paid	chance of spending unwisely
Interest is charged only on the use of funds	Track record is a requisite
Continuous access to money	Greater interest charges

 

Microfinance

Microfinance is basically for people with little cash inflow. People with no formal credit history or score can benefit from it too. Just as the name microfinance implies, this is a financial institution for short term purposes. The credits given by this institution is usually very small. It is mostly supervised and approved by Non-Banking Financial Corporations (NBFCs). People with no access to traditional loans also make use of this source for funds.

With the aforementioned qualities, it is only fair to assume that their eligibility conditions are low. New businesses can easily access the needed funds for running their services from this source. However, it is important to note NBFCs fund different types of businesses. Certain NBFCs have a specific target group and sometimes a very exact type of loan that they would assist with.

The terms and interest charges are almost the same as in traditional banks. In some cases, their interest charges are much higher than that of traditional banks. A few of the NBFCs also offer a lot of other exceptional services like chit reserves. There are also other services like advances and other banking financial services. These services can also be of great help to business owners.

 

Advantages Of Microfinance	Disadvantages Of Microfinance
Faster processing	Huge interest charges
Less strict eligibility conditions	Small loan amounts
Less rules and regulations	Not as common as traditional banks

 

Equity

Debt is not everyone’s longing. Some may be comfortable borrowing while others may find it hard to do. There are various strange beliefs against debts. Some of these beliefs may be cultural or moral oppositions. Other sorts of opposition could be from business stability. It is wise to be sure one’s business can stand the risk of debts before getting a loan. An entrepreneur should be well aware of what comes with debts before getting involved. A business owner with the knowledge of his or her business’s level of certainty would prefer equity to loan.

Equity is when a company’s part ownership is given out in exchange for money. The money normally comes in what is called, venture capital. This is a sort of fund that is invested in companies with big risks. These companies may have high risks but great potential for possible returns. Investors are aware of this risk but go on to invest because of the foreseen possible turnovers.

Most times it is difficult to physically determine a company’s exponential results. A concept called business valuation can however, be used to correctly predict the future of a company. There are several methods to carry out the valuation of a company. Nevertheless, a general rule is most times observed. This rule states that five times the annual revenue of the business if the future value of the company. For instance, a company that makes about Rs 1,000,000 in an entire year is assumed to have the value of about Rs 5,000,000. This method is the easiest way to attain the value of a business. Sometimes, however, this is not the case but it at least makes a reasonable projection.

In a situation where a business had currently left its startup stage, it’s a bit difficult to make sure projections. A situation where there are no sales or operations, valuations depend mainly on the future cash inflows. These cash flows are dependent on the company’s performance. Investors at this stage tend to study the profile and biodata of the business owner before investing.

The type of investments from capitalists depends solely on the level or stage a business is in. There are also different kinds of funds for different business stages. This article will reveal the practical steps necessary in getting startup funds for businesses.

Seed/Angel Funding

This is a type of funding given by angel investors. Angel investors are business people that major act as mentors and capitalists in a business. The startup stage is the initial stage in every business. Usually after the business idea, some entrepreneurs go on to get partners that buy into their ideas. The next step right after this one is building a business prototype. In this stage, the business owners invest their own money to make a physical representation of their business ideas. This is not enough to sustain the business idea or even get it going but it normally goes a long way to help.

Seed funding is the first stage of funding in any business. This is the fund used in building the business idea’s prototype. This fund is also used in developing products, hiring the important workers for the business besides the shareholders. The money is also used in building the elementary stage of cash inflow into a business. After this stage, investors investigate products to know if it is market worthy. Capitalists can also supervise the reaction of future clients towards the products. Every business at this stage needs a valuation of the idea and potential of growth. This stage is mostly directed and led by people willing to invest. These people willing to invest are known as angel investors.

Accelerators and Incubators

Incubators and accelerators are another types of funding in the business. They are usually seen around the same time as angel investors. They are usually organization of experts and investors that work together with business owners. Their real duty is to direct business startups in its original track. They most times fund the startup stage of business. And other times, they do the duties of mentors and resource providers.

Accelerators and incubators are used interchangeably at times but they have different meanings. Incubators are particularly different from accelerators. Incubators take the idea stage of a business and mold it into a feasible business model. Accelerators help the business grow and move beyond already existing businesses.

Accelerators set out business programs with time frames. In these sorts of programs, mentors work at the beginning of the business to set things straight. They also use accelerator programs to set the fundamental pace of the company.

For instance, a business owner that would want to get involved in an accelerator program would be given a small investment. This is done to connect such an entrepreneur to the right circle of investors. The business owner is also given a free access to a mentorship network. This is given in exchange for equity.

Accelerators and incubators also help with startup funding. In addition to funding, they also provide resources and the right mentorship.

Incubators on the other hand, come right before accelerators. They are very functional and active at the initial stage of a business set up. Organizations into incubation, offer things such as office space and emotional support. They help an entrepreneur to actively grow from the startup stage to the prototype stage. And then finally, the business is moved to the product-market fit stage. At this stage the business products are tested to know if they are marketable. Incubators also continue to mentor a business owner to a suitable growth stage. All these services are given in return for the business’ equity.

It is important to note that accelerators and incubators are very hard to come by. Studies have revealed that less than 2% of businesses that apply for this sort of funding get taken. Businesses that succeed in getting it and most times expected to relocate for a given period of time.

Hurried development is the only measuring scale most investors look out for at this business stage. Investors also would want to see the marketable the business product and services are. They also would lookout for how good the business understands its ideal customer and how good the seed fund was used in the startup stage. Investors use average revenue per customer (ARPC) measuring scale in determining how far the cash inflow of a company will go.

How long raising funds takes

To get a grip on how raising funds work, an entrepreneur needs to understand the entire process. There are procedures and processes a business idea needs to go through before funds can be invested in it.

Investor Pitch

Assuming the entire pre-stage business processes have been achieved, there are other things to be done. An entrepreneur can go further in discovering the angel investors, investors, and organizations he or she wants to work with. The next step after this would be to develop an interesting and attractive pitch. A pitch is achieved when a meeting between investors and business owners is set up and business ideas discussed.

Sign off Term Sheet (TS)

A business owner and investor naturally after the meeting, lists of their negotiations and agreements on a piece of paper. This paper is known as The Term Sheet. In this piece of paper, the parties are expected to put down a detailed list of ‘who brings what’ and ‘who gets what’. It is usually in parts and with other conditions. They are not usually a permanent bind and is expected to expire at a particular date.

Due Diligence

Investors at the end of the term sheet stage hand-over the fund to entrepreneurs. However, most of the time, they would like to confirm their initial conviction of such businesses being the best deal. At this stage, they carry out a whole lot of demanding financial and legal due diligence before they proceed on to the next step.

Shareholders Agreement (SHA)

Sometimes, something comes up after investor’s due diligence. When this happens, investors resort to protecting their rights and those of the shareholders. This they do in a very detailed form. They also make it obvious made in writing. The writing will be very detailed to cover a range of other matters that will protect all the shareholders. The arrangement besides protecting the shareholders also protects the entrepreneur. This agreement is also done to settle any future disputes that may arise in the future.