I am setting up a new business, do I need to raise cash, and if so how do I go about finding funds?
There are various ways of raising money to support a business whilst it still finds its profitability legs.
When you are starting out, you’re not at the point where a traditional lender or investor would be interested – you’re too much of a risk. So that leaves you with selling personal assets, borrowing against your home, maxing out credit cards, and asking loved ones for loans.
There is a lot of risk involved, including the risk of bankruptcy with your personal finances and relationships with friends and family.
Friends and family
If approaching family and friends, you need to keep the agreement strictly business – put the agreement in writing. State how much money you need, what you’ll use it for and how you’ll pay it back. Doing this not only protects both parties but also your relationship.
An overdraft can work
One of the most common ways to finance a new business is via using an overdraft – you can use as much as you need (up to your limit), cash is available when you need it and you only pay interest on what you use.
Applying for bank funding
Another option is to borrow money from your bank to run your business.
In exchange for lending the money, the institution becomes a creditor of your start-up and is entitled to receive interest and to have their loan repaid at the end of a given period.
Long-term debt financing usually helps to cover the purchase of facilities, equipment and vehicles. Short-term financing allows entrepreneurs to cover day-to-day needs such as inventory and payroll.
Venture capitalists take equity
Venture capitalists (VC) are a type of private equity, and are another good option for some business types. Equity funding by outside investors into early-stage, high-potential, high-risk ventures usually demand above-average returns.
VCs work whereby they own equity in the company it has invested in, which usually has a new technology or a new business model in high-tech industries.
A potential con to using a VC, is that in young businesses, they usually get significant control over decisions, in addition to company shares and future value.
The benefit of VC funding is that they provide strategic direction, as they ultimately want to grow investments to a profitable exit. As an entrepreneur you will gain from their experience, insights into international expansion, legal, intellectual property (IP) protection and an enviable contact base.
Bootstrapping is another option
Of course, there are some businesses can be self-sustaining: built up quickly enough to make money without aid from investors who might otherwise come in and take over. But this is dependent of many factors.
Remember. This is what sets entrepreneurs apart from the employed: taking risks to start a business. It’s an entrepreneur’s rite of passage.