Tuesday, July 20, 2010

Four Ways to Raise Funds for your Business

When I started my first small business last year, raising funds is one of the most challenging part. I wanted to have a small business because I really do want to start making even just a little step out of being an employee. 

Many small business owners will agree with me. Setting up your FIRST small business is not an easy thing to especially how will you raise your funds for your business.

In my case, I have a small business idea in mind. I shared it with my two friends and invited them to be my partners. Luckily, they agreed with my business plan and decided that we will all put funds to our small business. That is how I did it. 

In this post, I saw a very useful article from Entrepreneur Magazine Official Website (my favorite magazine) for those of you who still have no idea on how you will raise your own funds in setting up your small business. Here is the link: Four ways to raise funds for your business 

Read on this article and you can't imagine what knowledge it can give to you.

One of the most vexing steps and a potential idea-killer in starting a business is the issue of raising money.

Financing is often a problem that dissuades most people from even trying to put up a business.

Often, when the subject of financing a business comes up, people think about loans, but there are other ways of raising money for your business.

But before going around raising money for your business, know how much  you actually need to start a business. This is where your business plan, specifically the section on financial planning, enters the equation.

The financial plan will tell you how much you need to start and maintain the business. As a rule, you must raise enough money to start up and sustain the business for a few months -- six months to a year -- while you are trying to introduce your product to the market.

1. Personal Savings

Your personal savings is the first thing to pop in your head in starting a venture.

Tips: If you plan to use your savings as funding source, start with a small business venture, like a buy-and-sell business, and use the proceeds of the business to grow it.

Try not to dip into your savings a second time.

To grow your savings and thus your funding source, explore investing your savings in a high-yielding financial instrument, like mutual funds, to grow your money faster.

2. Property Sale

 Besides dipping into your savings, you can try selling some of your property, including your car, jewelry, antiques, furniture, phones, even memorabilia and collectibles like hard-to-find comic books.

Tip: You can dispose of these items, especially antiques and memorabilia, either by organizing a garage sale or by auctioning these items on Websites like eBay. 

3. Borrowing from family or friends

Next to savings, a very popular way of raising funds is borrowing from friends and relatives. This kind of fundraising is popular because borrowers often get a little to no interest on their loans, has optional collateral requirements and very flexible payment terms. 

However, the downside is that when one is unable to pay right away, one's relationships often take the brunt of the problem.

Tips: To prevent complications when borrowing from friends and relatives, it is best to put everything in writing. This would spell out when and how much you would have to pay.

You also need to make the involvement of the debtors in the business clear -- will it create control or management prerogatives in your business, will it give your debtors an ownership stake or authority to make decisions in the business?
Clarify these arrangements firs before borrowing from friends and family, in order to avoid problems in the future.

 4. Business loans

You can also resort to loans from banks, microfinance organizations or cooperatives. 

Tips: When trying to get loans from banks, know that most banks do not lend to startups, especially those that have been around for less than a year.

Although there are some banks that offer products and even target startups, such loans often have high collateral requirements. If you have no business experience at all, you can explore getting personal loans from banks in order to startup a business

An  alternative borrowing from banks is borrowing from cooperatives and other microfinance institutions. Microfinance institutions such as the government-backed Small Business Corp. (SBC) are mandated to provide assistance to small businesses with little capital by providing loans with reasonable terms and affordable interest rates.

SBC in particular offers collateral-free loans on the condition that the entrepreneur would subject his business to inspections by the SBC to ensure that the borrowed money is properly utilized.

One can also approach venture capitalists -- the few of them -- operating in the country. Venture capitalists are willing to provide loans for promising startups at generous terms, in exchange for equity in the company.

Credit cards are a possible fund source because you can get credit without going through a lot of trouble and without needing a guarantor or collateral.

However, you could easily rack up your credit card debt if you do not pay the monthly installments or monthly due amounts in full.

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