Raising Cash for Your Business
There are two things Entrepreneurs often want more of: time and money.
And while you can't increase the number of hours in a day, there are many strategies you can embrace to improve your cash flow.
Whether you need a few hundred euros or much more, here are some options to consider for managing and raising cash.
1. Reduce financial stress
Before deciding to raise new capital, take a look at your business expenses.
By monitoring expenses carefully, questioning fixed costs, controlling variable costs, timing your payables and choosing alternative methods of payment,
you can reduce the financial stress on your company. The objective is not to compromise quality or service but to better manage your money.
Consider these techniques:
- Negotiate with suppliers to stretch bill payments to 90 or 120 days
- Defer the full cost of equipment by considering leasing
- Join a barter network or exchange services within your own network
- Invoice discounting
2. Invest in yourself
Regardless of how careful you are with expenses, additional funds may still be required for your new or growing business.
The idea of working with "other people's money" may sound good, but investors and lenders want to see some of your "skin in the game."
It's important to personally invest something in your business. Banks and outside investors will take you more seriously if you prove that you have invested in yourself. Make sure you consult your own financial advisor to determine how much you can afford to invest without overextending your personal resources.
Your personal investment can come in the form of cash, "sweat equity," or assets you can invest in the business, such as computer equipment or a vehicle. Your personal investment may also include outside funds from:
- Full-time employment income
- Part-time employment
- A business partner
3. Money from friends and family
Called "love capital," money from people close to you is often the easiest to secure.
Loved ones already know your strengths, commitment and will be more likely to believe in you and your business vision.
It is important to repay their kindness and support by handling their investment with respect.
Write up a simple agreement of understanding outlining when the money will be repaid and whether or not interest is expected.
Avoid awkward moments at future social functions by agreeing when not to discuss the loan or your business affairs.
Love capital:
- Is often easier to secure
- Can offer more flexible repayment terms
- Can complicate friendships and family relations
- May put people you love at risk through your business activities
4. Debt financing
Financial institutions are a common source of financing for your small business, but it may be difficult without an extensive financial history.
It is important to supply them with all the information they need to make a decision.
A professional business plan with three years of projected financial statements that support your ability to repay the loan is essential.
Before you approach the financial institution, check your credit rating with a credit bureau and clear up any inaccurate or out-of-date information.
Be prepared to offer collateral as security against the loan.
Types of loans offered at financial institutions include:
- Long-term loans secured by fixed assets such as property or equipment
- Working capital loans for operating costs such as marketing expenses and salaries
- Specialty loans (e.g. import/export, expansion, consolidation or management buy-out)
To apply for a loan at a financial institution:
- Develop a confident business plan that demonstrates your experience, anticipates why the business will succeed, and contains forecasts that make sense
- Be prepared to show how much you are personally investing and how much you have raised from other sources
- Document exactly how much capital you need and what you need it for — don't suggest a range
- Know what you plan to do if they only offer you part of the money you need
- If a business loan for all your requirements is not available, be prepared to consider other financial products such as lines of credit, credit cards and overdraft accounts
- Always be professional, calm, respectful and confident
- Don't expect a quick decision, as financial institutions must follow internal processes including credit checks
- Always negotiate loan terms
- If one financial institution turns you down, you can try another
5. Secure advance sales
Securing advance sales is an option for businesses selling customized products or unique services. Get your business off the ground by making a sale and asking for a retainer or deposit up front.
- Invoice early and consider offering discounts (such as 2/10, net 30: 2% discount if paid within 10 days; or pay the full amount within 30 days.)
- Negotiate an up-front commitment and payment during the sales process
- Take your sales contract to your financial institution to demonstrate the viability of your business
6. Consider an outside investor or partner
Outside investors, or equity financing, means selling shares in your company.
If you decide to go this route, try to retain majority control and be sure to clearly define the role of any investor.
You may prefer a "silent partner" who has the capital but doesn't want any day-to-day involvement in your business.
Alternatively, you may prefer an investor who is prepared to contribute their expertise as well as capital, such as a Business Angel.
Before talking to potential investors:
- Decide how much of the company you are willing to sell
- Determine whether you want silent or active investors. Venture capitalists typically want a say in the running of the business and "angel" investors are silent
- Hire a business lawyer to review investment options and agreements
- Define how your investors will be paid (share dividends, percentage of profits, salary, retainer, etc.)
Many new small businesses fail because of insufficient cash flow. Sales and revenues are often farther away than they seem. Expenses are often closer and greater than expected. Therefore, it's extremely important to plan carefully. Consider these suggestions and seek out other advice from experienced business owners to help take the pressure off your cash flow so that your business can prosper.
Adapted from an article by Entrepreneurship Expert Roger Pierce, BizLaunch.ca, June 2007