How Do I Raise Money to Start a New Business?
This is really a big question and is going to require a whole lot of posts. There are two main ways, and a lot of smaller ways, of raising money for a new business. The two main ways are debt financing and equity financing. Debt financing means you borrow the money to start your business and equity financing means you sell ownership in your business to raise the necessary capital.
When most people think of borrowing money they think in terms of banks. Many start ups go to banks thinking they would just borrow the money to get their business off the ground. What they soon find out is that banks are not in the risk business, and since starting a business is risky, not many start ups get bank loans. In all cases, you need a credit score of 680 to even get in the door. Then you will have to sign personal guarantees and also put up collateral or assets to cover the loan. Having the loan guaranteed by the SBA may help, but you will be paying fees and a higher interest rate to get it. Check out how much documentation is required and how long it will take to get it all together, you might be surprised at all you will have to show to get a loan.
Equity financing is used a lot by start-ups because you don’t have to go through all the paperwork, you don’t need a high credit score, and with many investors (angels) you get someone who can also help and give advice to your business. The problem with equity financing is that you give up ownership by selling off stock (if you are a Corporation or an Inc.) or membership units (if you are an LLC). There are good and bad investors. Just make sure you get good ones that really can help your business grow. A bad investor can be like a cancer in your business. Stay as far away from them as possible! Also, you need to be aware that giving up too much ownership may mean you are not in control anymore. There are numerous cases of a founder giving up too much ownership (especially at the early stages of the business), losing control, and getting booted out of their own business!
Which way should you choose to raise money? Most people, if they can borrow the money, prefer to go the debt route. Unfortunately most small business can’t borrow the money so they are forced into equity financing. This is exactly what happened to me. Over a seven year period I did over 200 investor presentations. It was a lot of work, but since I liked to sell and was good at it, I was successful at raising money that way. At the beginning it was really tough. I did 24 investor presentations before I got my first check. These 24 presentations and 24 “No’s” gave me the best possible education in how to raise money. Like all things, the more you do something the easier it gets.
We really do have a lot to cover in this area! More to follow! If you have any questions or comments, be sure to e-mail me at email@example.com.