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How to Raise Money and Grow Your Small Business

Posted by Jeff Hardy in Business Loans SBA                          Words in this Post: 617

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Let’s say that you have started a brand new business. Growing a new small business to $1,000,000 a year will take a sizeable amount of capital. You will probably need to be able to complete hundreds of sales per month. You will need at least one employee. With this kind of volume you probably cannot operate out of your home, so you will need to rent space and furnish it.

It is possible to raise money before you start a business. However, raising money for a new, unproven startup can be very difficult. I recommend you start your business and run it profitably at a lower level for at least a few months. This will demonstrate your ability to create a profitable business model and execute it. More important, it will give you credibility with bankers and other lenders and make the job of raising capital much easier.

Bankers, other lenders, and professional investors are far more willing to invest in an ongoing business than a start-up. After you prove a Business concept, and demonstrate your ability to execute it, raising capital through investment or debt financing becomes a matter of demonstrating the scalability of your business. (If I had XX dollars, I could grow my business XX percent.)

There are three basic types of investment capital available:

• Retained earnings
• Debt
• Investment (venture capital)

Retained Earnings

All capital has a cost. Retained earnings are the profits from your business that you reinvest in your enterprise. If you’re making enough money to reinvest your earnings, do so, as this is the cheapest form of capital you will ever find. Also, the fact that you are reinvesting your own profits back into the company makes your business look more attractive to lenders and investors. Just be sure to keep track of this amount, something that’s very easy to do if you’re using QuickBooks.

Debt Capital

Debt capital is simply borrowed money. The advantage of borrowing money over finding an investor is you don’t have to give up any ownership in your company. The downside is that banks and commercial lenders usually require collateral or that you personally guarantee the business loans, or both.

A loan is a good solution when you only require a small amount o ‘money and if you could pay off the debt if you had to without losing your home or going into bankruptcy. For example, if you borrow between $10,000 and $20 000 and then, for some reason, your business fails, the loan amount is small enough that a bank will work out a payment plan with you. If, on the other hand, you wanted to borrow $50,000 to $100,000 or more, most banks will immediately foreclose on the loan the moment you default. An exception to this is when you have inventory to put up as collateral.

Investment Capital

Investment capital, also called equity capital, is money that you or someone else invests in your business in exchange for a share of the ownership or profits.

Some budding entrepreneurs borrow money from, or find investors among, their own families and friends. There are two drawbacks to doing this. First of all, these people are not professional investors, and they will constantly be giving advice and interfering in your business decisions. Secondly, if something does go wrong, you could very well lose your friends and put stress on family relationships.

There are people outside of the friends and family circle that may be able to finance your brand new or existing business, these are called Venture Capitalists. These Venture Capitalists look at your business model, the past performance, the future prospects and then if they like what they see, they would invest money in exchange for a percentage of ownership in your business or a share of profits/revenue.

Author: Jeff Hardy

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Tags: raise capital for new business, venture capitalists