Starting a Business? Here Are Some Tips for Raising Needed Capital
When starting a business, it is likely that you will need some amount of capital in order to get your venture up and running. Different types of businesses will need substantially different amounts of funding. However, in any case, it is a good idea to know how much capital you will need prior to getting started, as well as where to obtain it.
Initially, the capital you require may need to either be borrowed from a bank or other lender, or obtained from personal savings. However, once the business starts to gain sustainable revenue, you will typically be able to budget for your expenses from this revenue stream.
How and Where to Find the Funds You Need
In some cases, obtaining money is not difficult. Yet, getting the right type of funding at the right time – and with the best terms – is what truly matters. The following tips can help you in more closely narrowing down the proper amount and type of business capital that you need.
Determine Your Initial Start Up Costs
The first priority in raising capital for your new business is to determine your approximate start up costs. Depending on the type of business you are in, you will likely have specific items of expense. For many businesses, however – regardless of what industry you are in – there are certain general expense items such as:
- Lease / Rent
- Licensing and Permits
- Professional Fees
- Marketing and Sales
- Payroll and Payroll Taxes
Develop Sales Forecasts
A sales forecast can be considered the backbone of your business plan. A business is typically measured by its sales – and it is the sales forecast that sets the standard for expenses, profits, and growth.
In developing your forecast, you should estimate your company’s sales, month by month, over at least the next 12 months – and then year by year for the following 2 to 5 years going forward. In most business plans, having a 3-year sales forecast is good protocol.
If your company will have more than just one line of sales, show how each line is anticipated to perform, and then combine and consolidate. In addition, if your company has no previous experience in selling the particular product or service you’ll be offering, you could use past data – if available – to make your projections.
Calculate the Amount of Financing You Need
Once you have determined the amount of capital you’ll need for start up, as well as for ongoing expenses, you will need to make a determination regarding the actual amount of capital you will need to borrow.
Doing so can be one of the greatest challenges that a new business owner faces. Today, capital markets can be quite complex – making it difficult at best to calculate exactly how much external financing will be needed.
The primary components that will drive this number will include the amount of start-up capital that is needed, as well as the amount of working capital you will require going forward. This is the amount of money that your business will need to have available for its day-to-day operations and activities.
Asking for the Funds
One way that new businesses obtain capital is through the use of business loans, or debt financing. This can include borrowed funds that are either secured and unsecured. With secured funds, you will be asked to provide some type of collateral to the lender. Should you be unable to repay your loan, the lender can seize the collateral in an attempt to cut its losses.
Unsecured loans do not require collateral. While this type of loan is less risky for the borrower, it does entail much more risk for the lender. Therefore, unsecured loans typically command a higher interest rate to the borrower – essentially making your cost of borrowing funds more.
In lieu of borrowing, some businesses obtain equity financing. In this case, the business will issue shares of its stock and receive funds in return. Depending on how the equity capital is raised, the business owner may need to relinquish anywhere from 25 to 75 percent of the business to its new shareholders.
Venture capital is one of the more common forms of equity financing that is used today. The amount of equity that a venture capitalist holds will be a factor of where the new company is in its development state, as well as the perceived risk to the investor.