How to Raise Initial Investment Capital for Small Businesses
Sources of Initial Investment Capital.
Raising initial investment capital for new businesses is challenging. But if you are creative enough, raising your investment capital will not be that difficult.
Knowing how to secure initial investment capital is crucial to making your dreamed business a reality. Now how to conceive a good business idea is not a problem to you. It is even possible that you have prepared your business plan and everything is pointing to the direction of a good success. But it can be very frustrating when it comes to raising of the initial investment capital needed to kick start the business. This is where some people give up. Many songs remain unsung, books unpublished, businesses that have the potential of becoming a conglomerate not started as a result of inability to raise the required investment capital. What can be frustrating more than this? This is not supposed to be if only some of these people know what to do. Giving up is never the answer. Raising the start up investment capital is just one of the huddles that need to be crossed. Every successful business we see had one time or the other been faced with the same challenge of how to raise capital. The amount required may be different. How do we then overcome the challenge of lack of investment capital? It first begins by knowing that the investment capital required is definitely somewhere. The question of ‘where the investment capital is and how you can assess it’ is addressed in this article. But it is good to quickly point out that every financing option for your investment capital has its own implications. Before you start sourcing for investment capital, fundamentally you need to clarify certain things such as the amount you require, the duration of such fund, whether it is for short term or long term, the type of security you have to offer and your readiness to share the ownership of your business with others.
Before we continue, I like to point out that business is usually in phases. You may not need or be able to raise the total amount needed to run your business at once. As an entrepreneur, you should be able to prioritize and determine the amount needed as a start up costs. There should be enough justification for all expenses you incur at this stage. The amount needed will differ from one business to another. Some will require little capital while some will require large capital outlay. In general, the initial capital outlay will include the following:
- Cost of business registration
- Cost of necessary permits
- Cost of securing a place for the business
- Cost of purchase of assets
- Cost of inventories
- Working capital for initial months of no or insufficient cash flow for the running of the business.
Read Also: Working Capital Management in Small Business
Securing a place for your business may be very expensive at the start up stage. Considering starting your business at home if possible can be a good way to reducing your initial costs.
Sources of Initial Investment Capital
Personal Savings
Personal savings is your own money. This is the amount you have saved over time possibly from your salary or gifts. This includes cash in hand and cash in bank whether in savings, current account or fixed term deposits. It also includes your investments in shares and bonds.
Another area that people tend to overlook is the sale of personal assets. This is a bitter truth that many people don’t want to hear. Some even see it as forbidding selling off personal assets. There are people with stored assets which they are not currently using. The assets are just occupying space in their home. The question is that, if you actually believe in your dream, why should it be difficult to sell assets which you can easily replace when your business generates profits? A friend of mine narrated his story of how he had to sell his plot of land in order to finance his business then. As at the time he was telling me the story, he had not only bought other plots of lands, he has built houses in choice area in the country. All these happened just within five years! If you have such an asset in your disposal, it can be a good source of finance to your business.
Caution! Using your personal funds as investment capital can cause a strain in your personal and family finance. Ensure you set aside reasonable amount for your family needs as your business may not turn in profits in the initial months.
In most cases, the amount realised from personal savings will not be enough to start the business. But you can start with what you have by starting small to grow big. By this, you are actually curtailing your risks. Before you start a business, there is no way you will know everything about such a business until you get started. At this small scale, any mistake you make may not have much impact on the business compared to when you start big. You can easily learn from your mistakes and move ahead.
For those that want total control of ownership over their business, using personal fund to start the business will be a good way of sourcing initial capital for the business. Using personal funds also put your mind at rest. You are not under pressure to pay back interest or loan principal. With your mind at rest, you will be able to think right and be creative. This will enhance your productivity. Putting your own money is a proof that you believe in your business idea and this can encourage other people to lend you needed supports.
The disadvantage is that with little capital available, the growth might be slow and you may not have funds to seize opportunities as they come.
Supports from family, friends and relations
I believe that everyone is connected to some people who may be their parents, brothers, sisters, cousins, aunties, friends, colleagues and relations. If you make your plan of going into a business known to them, there is very likelihood that they will support you either financially or otherwise. While some may offer cash, some may help with assets that you will need to run the business. When you are seeking for help, you don’t need to restrict your expectation to cash gifts. Some may have property which they may release for use as business location.
When you are seeking financial help from family members, friends and relations; it is necessary that you make them understand the type of help you require from them. If it is going to be cash gift, they need to know that it is a gift so that they will not put their mind on getting the money back from you neither should they mistake it for an equity contribution in your business. If it is going to be a loan, agree the repayment terms in black and white. It can also be an equity contribution, share your business plan with them. Let such person be skilled enough to know the benefits and potential risks involved in the business.
This source of finance provides you more funds to growing your business than when you rely solely on your personal savings. Because these people know and trust you, they can provide you faster access to funds than following the bank loan procedures. Some may offer interest free loan while some may require interest. Generally, the interest on the loan may be lower than the bank rates and the repayment is usually more flexible.
Getting loans from friends and relations demands that you keep to the terms of such loans as both your business and personal reputations may be at stake.
Barter Arrangement
Before the advent of money which now serves as a medium of exchange, our fore fathers engaged in barter system. This is a system of exchange by which goods or services are directly exchanged for other goods and services without the use of money. Many think this system is no longer relevant today again. As an aspiring entrepreneur, you will soon discover that most of the people you will approach for investment capital are equally looking for funds to finance one thing or the other. If you find yourself in this type of situation, you should first identify what you need the money for. Once you identify that, the second step is to identify where you can get what you need the money for. Once you are able to identify these, open up discussion with your potential suppliers of the item you need about what you offer and how it can benefit them. Offer to provide your service in exchange for product or service you need from them. You will be surprised that some of them will accept your offer.
This is the method I used when I was to open my office. I needed cash for my office furniture but the cash was not readily available. I remembered that there was this furniture manufacturer who I have been trying to convince on the need to have proper accounting system. His complaint had always been that there was no cash. But when I mentioned barter arrangement to him, he gladly accepted. It was a win-win approach to both of us. Another good thing about this approach is that it helps you increase your sales. If you do a satisfactory job, you can also enjoy referral from them to other customers.
Bank Loan
Getting loan from the bank is not easy to get by especially for a new entrepreneur. Nevertheless, this is not to say that banks don’t give loan to young entrepreneurs. If you satisfy their conditions, they will definitely grant you loan for your business. Banks are willing to grant loan as long as they are sure of getting back their funds including the interest thereon because that is the only way they can remain in business too. Knowing what the banks are looking for before they can grant you loans will help you prepare adequately when approaching them for credit facilities. In most cases, banks usually require that you personally invest between 20 – 30% of the amount you request. Another option may be to apply for business credit card
Read Also: How to Get Loan for Small Business
Leasing
Leasing is a creative way of securing initial investment capital/assets. Leasing in a simple definition is a contract between two parties where one party (the lessor) provides an asset for usage to another party (the lessee) for a specified period of time, in return for specified payments. Lessor retains the ownership of the assets throughout the life of the contract. If your business involves the use of equipment which may be too expensive for you at start up level, you can choose to rent such equipment from a leasing company.
In contract to bank loan, you don’t need any collateral in a leasing arrangement as the asset itself serves as collateral. The lessor only focuses on your ability to generate cash flows from the business operations to service the lease payments. Leasing can provide access to short and medium term financing. Less emphasis is placed on your credit history under a lease arrangement in contrary to the requirement for accessing bank loan.
With leasing, you are able to manage your cash flow more effectively. The money you could have tied down in the acquisition of equipment can be used as part of your working capital. In case of any change in technology, such asset can be replaced if necessary. The lessor usually bears the risk of ownership.
Before you enter into any leasing arrangement, ensure that the terms of the leasing are favourable to you. Some leasing are non-cancellable. Any early termination will attract severe penalties. Some lessor will require that you pay insurance premium on the leased assets. In most cases, you don’t have control over the insurance premium as they usually determine the insurance broker.
Hire Purchase
This is a method of acquiring assets without having to invest the full amount or a large lump sum upfront in buying them. It involves the payment of initial deposit and regular payments for a specified period of time. Hire purchase is similar to leasing; the main difference between the two is that with hire purchase the business owns the asset after all payments have been made. Hire purchase is a good medium-term source of finance.
The main advantages are that you can have the use of up to date equipment immediately and payments are spread over a period of time. This will ease your liquidity. But hire purchase is more expensive than buying in cash.
Government Grants
Government usually provides financial assistance for some businesses especially those that are in line with the government policies. For example, government may decide to promote agriculture in order to reduce the country’s dependence on imports of agricultural products. If you have a good business plan and have it submitted to the government agency in charge, it will surprise you that government can assist you in raising investment capital needed to execute your plan.
Government grant is a free source of finance. This is not loan and therefore does not require repayment neither do you need to give up a share of your business. In most cases, certain condition may apply. Therefore, not all businesses may be eligible for a grant. If you meet the conditions or criteria for eligibility, it is advisable that you avail yourself because it is real.
Another way government helps small businesses in accessing initial investment capital is through loan guarantees. Small businesses usually don’t have assets to offer as collateral for loan. Government can guarantee your loan in order to help you attract lenders who ordinarily would not have granted you such loan.
Additional Partners
It is possible that after you have explored all opportunities, you are still not able to raise the required investment capital that is needed to start your business. Considering partner(s) may make sense. You should not be too selfish when it comes to business. Some people will rather prefer getting drown in the water to calling on others for assistance. This life is all about give and take. It is true that you own the business idea; other people equally have what you don’t have. If you have people you could trust and can provide the cash needed, it makes sense to involve them in the business instead of suffering from “eat alone, die alone” syndrome. Nevertheless, it is important you don’t make money the only reason you are bringing in additional partners.
If somebody is joining you as a partner, you are no longer the sole owner of the business. Decisions have to be made by both of you. In that case, it is better to have a written agreement in form of partnership Deed, if your business structure is partnership, in order to avoid future conflicts. Partnership deed is a document that outlines in details the rights and responsibilities of all parties to a business operation.
Business Angels
These are professional investors who specialize in investing in new and growing businesses in return for a share of equity. Approaching these individuals can be a good way of raising investment capital for your business. They will not only provide funds, they will support you with skills, experience and expertise required to run your business profitably. They can also give you access to their network of friends for possible business relationships. Before you can secure investment capital from any business angel, you must be able to demonstrate your knowledge about your business. The business should offer a high rate of return. As it has been mentioned, business angels are investors. Therefore, they expect equity participation in your business. If you are not willing to share or give up control of your business, this may not be a good source of finance for you.
Read Also: Vital Sources of Finance to Small Businesses
With these tips, I believe it should no longer be difficult for you to raise your initial investment capital. When you start your business, other financing options shall emerge.