HOW TO RAISE MONEY FOR
STARTING A BUSINESS
The task of raising money for a business is not as difficult as most people seem to
think. This is especially true when you have an idea that can make you and your backers
rich. Actually, there's more money available for new business ventures than there are good
business ideas.
A very important rule of the game to learn: Anytime you want to raise money, your first
move should be to put together a proper prospectus. This prospectus should include a
resume of your background, your education, training, experience, and any other personal
qualities that might be counted as an asset to your potential success. It's also a good
idea to list the various loans you've had in the past, what they were for, and your
history in paying them off.
You'll have to explain in detail how the money you want is going to be used. If it's
for an existing business, you'll need a profit and loss record for at least the preceding
six months, and a plan showing how this additional money will produce greater profits. If
it's a new business, you'll have to show your proposed business plan (see our report
#3503), your marketing research, and projected costs, as well as anticipated income
figures with a summary for each year over at least a three year period. It'll be
advantageous to you to base your cost estimates high, and your income projections on
minimal returns. This will enable you to "ride through" those extreme ups and
downs inherent in any beginning business. You should also describe what makes your
business unique how it differs from your competition, and the opportunities for
expansion or secondary products.
The prospectus will have to state precisely what you're offering the investor in return
for the use of his money. He'll want to know the percentage of interest you're willing to
pay, and whether monthly, quarterly, or on an annual basis. Are you offering a certain
percentage of the profits? A percentage of the business? A seat on your board of
directors? Remember: the investor is seeking as much as he can get in return for the use
of his money, regardless whether it's a short term or long term deal. In order to attract,
interest, and persuade him to "put up" the money you need, you'll not only have
to offer him an opportunity for big profits, but you'll have to spell it out in detail.
Further, back up your claims with proof from your marketing research.
Venture investors are usually quite familiar with "high risk" proposals, and
they all want to minimize that risk as much as possible. Therefore, your prospectus should
include a listing of your business and personal assets with documentation usually
copies of your tax returns for the last three years or more. Your prospective investor may
not know anything about you or your business, but if he wants to know he can pick up his
telephone and discover everything there is to know within 24 hours. The point is, don't
ever try to "con" a potential investor. Be honest with him. Lay all the facts on
the table for him. In most cases, if you've got a good idea and you've done your homework
properly, an interested investor will understand your position and offer more help than
you dared to ask.
When you have your prospectus prepared, know how much money you want, exactly how it
will be used, and how you intend to repay it, you're ready to start looking for investors.
As simple as it seems, one of the easiest ways of raising money is by advertising in a
newspaper or a national publication featuring such ads. Your ad should state the amount of
money you want always ask for more money than you need so you'll have room for
negotiating. Your ad should also state the type of business involved (to separate the
curious from the truly interested), and the kind of return you're promising on the
investment.
Take a lesson from the party plan merchandisers. Set up a party and invite your friends
over. Explain your business plan, the profit potentials, and how much you need. Give them
each a copy of your prospectus and ask that they pledge a thousand dollars as a
nonparticipating partner in your business. Check the current tax regulations. You may
be allowed up to 25 partners in SubChapter S enterprises, opening the door for anyone
to gather a group of friends around himself with something to offer them in return for
their assistance in capitalizing his business.
You can also issue and sell up to $300,000 worth of stock in your company without going
through the Federal Trade Commission. You'll need the help of an attorney to do this,
however, and of course a good tax accountant as well wouldn't hurt. However, it's always a
good idea to have an attorney and an accountant help you make up your business prospectus.
As you explain your plan to them, and ask for their advice, casually ask them if they'd
mind letting you know of or steer your way any potential investors they might happen to
meet. Do the same with your banker. Give him a copy of your prospectus and ask him if he'd
look it over and offer any suggestions for improving it. And of course, ask that he let
you know of any potential investors he or she may come across. In either case, it's always
a good idea to let them know you're willing to pay a "finder's fee" if you can
be directed to the right investor.
Professional people such as doctors and dentists are known to have a tendency to join
occupational investment groups. The next time you talk with your doctor or dentist, give
him a prospectus and explain your plan. He may want to invest on his own or perhaps set up
an appointment for you to talk with the manager of his investment group. Either way, you
win. When you're looking for money, it's essential that you get the word out to as many
potential investors as possible.
Don't overlook the possibilities of the small business investment companies in your
area. Look them up in your telephone book under "Investment Services." These
companies exist for the sole purpose of lending money to businesses which they feel have a
good chance of becoming successful. In many instances, they trade their help for a small
interest in your company.
Many states have Business Development Commissions whose goal is to assist in the
establishment and growth of new businesses. Not only do they offer favorable taxes and
business expertise, most also offer money or facilities to help a new business get
started. Your local Chamber of Commerce is the place to check for further information on
this idea.
Industrial banks are usually much more amenable to making business loans than regular
banks, so be sure to check out these institutions in your area. Insurance companies are
prime sources of long term business capital, but each company varies its policies
regarding the types of businesses it will consider. Check with your local insurance agent
for the name and address of the person to contact. Also, it's often possible to get the
directors of another company to invest in your business. Look for a company that can
benefit from your product or service. Be sure to check at your public library for
available foundation grants. These can be the final answer to all your money needs if your
business is perceived to be related to the objectives and activities of the foundation.
Finally, you may want to enlist the services of a money broker or finder. These are
people who take your prospectus and circulate it among various known lenders or investors.
They always require an upfront retainer fee, and there's no way they can guarantee to
get you the loan or the money you want. There are many very good money brokers, and there
are some that are not so good. They all take a percentage of the gross amount that's
finally procured for your needs. The important thing is to check them out fully. Find out
about the successful loans or investment plans they've arranged, and what kind of investor
contacts they have. Do all of this before you put up any front money or pay any retainer
fees.
There are many ways to raise money from staging garage sales to selling stocks.
Many foreign investors have money to invest in American and North American companies.
Don't make the mistake of thinking that the only place you can find the money you need is
through the bank or finance company. Start thinking about the idea of inviting investors
to share in your business as silent partners. Consider obtaining financing for a primary
business by arranging financing for another business that will support the startup,
establishment, and development of the primary business. Consider the feasibility of
merging with a company that's already organized, and with facilities that are compatible
or related to your needs. Give some thought to the possibilities of getting the people
supplying your production equipment to cosign the loan you need for startup
capital.
Remember: there are thousands upon thousands of ways to obtain business startup
capital. This is truly the age of creative financing. Disregard the stories you hear of
"tight money" and start making phone calls, talking to people, and making
appointments to discuss your plans with the people who have money to invest. There's more
money now than there's ever been for new business investment. The problem is that most
beginning business builders don't know what to believe or which way to turn for help. They
tend to believe the stories of tight money and they set aside their plans for a business
of their own until a time when startup money might be easier to find. The truth is, now is
the time to make your move. Now is the time to act. The person with a truly viable
business plan and the determination to succeed will make use of every possible idea that
can be imagined. The ideas suggested here should serve to propel you toward the unlimited
sources of monetary help available and waiting for you!
