How To Raise Capital To Start A New Business

By: Jeffrey D. Jones
As a long time business owner and a Business Counselor for SCORE, I frequently receive requests from individuals about how to raise capital to start a new business. The following information is the advice I give to anyone who desires to start a new business venture.
The two critical reasons most new start-up businesses fail is that they fail to develop a business plan and they go into business undercapitalized. Raising capital to start a new business can be a very daunting task. Equity capital and/or debt capital are the two types of capital that are needed to start or buy a business. Equity capital is money you have or money you obtain from investors who will own a portion of your business in exchange for putting up capital. Debt capital is money you borrow from a third party lender or from other individuals. Roughly 45 percent of all start-up businesses are funded with the owners’ own equity capital. If you don’t have sufficient funds of your own, then you will need to rely on others to provide either the equity or debt capital.
There are three sources of equity capital known as the “3 F’s,” which stand for family, friends, and fools. For the most part, the only people willing to invest in a new start up business are those who are very close to you and do it more as a favor than a true investment. In reality, why would anyone invest money in a new venture where they are a minority owner, have no control over operations, no control over distributions of profits, and must rely entirely on the skills and ability of the primary owner. Only close friends and family will consider such a venture.
For debt capital, the sources are banks, credit unions, family, and friends. Banks in general are not very interested in loaning money to a new business. They may be willing to loan money for you to buy equipment, but not any money to serve as working capital. So again, you may have to seek out friends and family who may be willing to loan you money. However, any lender will want you to make monthly payments regardless as to whether you are profitable or not.
One of the major problems small business owners encounter is that they use up all their available funds to buy equipment, inventory, rent deposits, etc., and then have no money left to serve as working capital to pay expenses while waiting for the business to generate sufficient sales to cover all the operating expenses. If often takes a new business two to three years to reach the breakeven point, and many never make it. These issues can be resolved by developing a business plan. This will force you to do the necessary research to learn about the industry you are choosing, and to prepare a five year forecast of income and expenses, which any equity partner or lender will want to see before giving you money. The business plan will outline how the money you raise will be spent and when you expect to repay the loans or provide returns on equity investments. Often in the course of developing a business plan, it will be determined that the idea is not feasible. If it is, then the business plan will be the support tool you will need to seek out equity and/or debt capital. You can obtain examples of business plans from the Houstonscore.org website. I strongly recommend that you get this information and begin the process of developing your business plan prior to seeking -debt or equity capital.
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Jeff Jones is President of Advanced Business Brokers and Certified Appraisers, Inc. He is also a SCORE Counselor. He can be reached at 713-680-3290 or by e-mail at [email protected].