When you think you have to raise capital, think of the banks last
By: Hitesh Khan/
Here is a hierarchy of money sources if you want to raise capital and if personal sources have been depleted:
- Friends and relatives – Go first to the people who know you best if you have to raise capital; hopefully these are the people who trust you the most. Consider whether you will be offering an equity stake in the business or whether you want to borrow money. There are advantages and disadvantages to each. You don’t have to repay an equity stake; on the other hand you will be sharing your profits with the stakeholders. You may also give up some control over your own business.
- A home equity loan – Lenders may give an ever-increasing amount based on ever-increasing home values which caused equity to increase which in turn could be used as collateral. Advantages of this source of money are low interest rates and a long period of time to repay. Disadvantages include the fact that you may lose your home.
- Credit cards – Credit card companies are tightening the amount of money they will lend. Your credit history, will determine how much money you can borrow. Be careful about borrowing more on your credit cards than you can afford to pay back. Many people have borrowed too much money and have gotten into a cycle of ever-increasing debt amounts and ever-increasing interest payments. If you are conservative borrowing on credit cards, however, this can be a relatively easy source of funds.
- If you have to raise capital never forget to think of your Inventory suppliers – Ask your suppliers to finance your purchases for a longer period of time. This can be like free money; however the amount of time suppliers will be willing to carry you may be limited. As with other sources, be sure to pay your suppliers on the agreed-upon date. Inventory suppliers are your lifeblood. When they refuse to sell to you, you may as well close your doors. You have nothing to sell. Suppliers may also help you pay for advertising and promotional programs.
- Equipment suppliers – Compared to your regular purchases, capital purchases can often be financed over longer terms. Consider also leasing equipment rather than buying outright.
- Your landlord – In today’s economy, many commercial landlords are facing high vacancy rates. Many will be willing to negotiate lease improvements that they will pay for in exchange for a relatively long contract. They may also reimburse you for moving-in expenses and may give you a few months free of rent at the beginning of your term.
- Customers – If you are giving credit to your customers you may want to encourage them to pay quicker by means of a discount. Making sure your customers pay you quickly will result in less need for financing so watch your accounts receivable carefully.
- Venture capital Venture capital is a type of private equity capital typically provided to early-stage, high-potential, growth companies in the interest of generating a return through an eventual realization event such as an Initial Public Offering (IPO) or trade sale of the company. Venture capital investments are generally made as cash in exchange for shares in the invested company. Venture capital typically comes from institutional investors and high net worth individuals and is pooled together by dedicated investment firms. If your new business has enough potential, venture capitalists may be interested in investing in it.
- Revolving Loan Funds – are an often overlooked to raise capital to start or expand a business.
- Government Guaranteed Loan Programmes – Small companies that are just starting out can apply for the SME Micro Loan that offers funding of up to S$100,000 to help you better manage daily operations and cashflow. To make the loan more accessible to new companies set up in three years or less, Enterprise Singapore shares the risk of loan defaults with Participating Financial Institutions in the event of company insolvency.
- Leasing companies – A commercial lease on capital equipment can be a lifesaver for startup businesses. Business equipment leasing can reduce your initial costs for acquisitions and can increase your cash flow. You can often borrow more advantageously from a supplier; however, if a supplier has no leasing program, this can be an excellent source of funds.
- Finance companies – Expensive alternative. These companies typically have no money of their own. They finance the business and borrow the money from a commercial bank. They will also sell the loan to a “loan holder” and use those funds to pay off the commercial bank. Often they make their money by servicing the loan. Everybody needs to make money which is why this is an expensive but sometimes necessary alternative.
- Banks – A banker will want to see your detailed business plan; he will want to make sure you’ve got a track record and that he trusts in your ability to pay back the loan. He will most likely ask you to provide the bank with plenty of collateral. Be sure to see a independent loan consultant (such as those at iCompareLoan) who can guide you through the maze to get you the best SME loan to raise capital.
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