There are many ways to raise capital, whether you have a new business or you have a business that you want to grow and expand. It isn’t easier or more difficult to raise capital in either case, but the methods can be somewhat different.
1. Hard Money Loans
Hard money loans are often not so easy, and not so cheap in terms of interest rates and payments—but they are sometimes the fastest way to raise the money that you need.
A hard money loan can come at a high price—some say your dignity—as you ask what many call “loan sharks” to help you raise immediate capital while they ask interrogationlike questions and scrutinize your taxes and credit.
These loans also come at a high interest rate; it is not uncommon to see 15 to 25 percent (or higher) for a relatively short-term loan! But there is an upside, and that is fast money, which could ultimately make or break your business, depending on the situation. For example, if you start a cleaning service and win the bid for a large retail complex, and they want you to start in one week, it will often take much longer than a week to secure the funds through a bank loan for all of the new equipment you need. A “hard money lender” may be willing to lend you the money within 48 hours; provided you pass the tests (like collateral) and have reasonable credit scores.
If you have strong reason to believe you will be able to pay the loan back fast, this might be an immediate good option.
So how do you find a hard money lender? You can talk with investment bankers who typically know of many. A good source I have found, believe it or not, are mortgage brokers. Their business often relies on them for down payment money, and so they may have a good supply of people to talk to.
2. Loans from Friends and Family
In the “old days” (one year ago) borrowing from friends and family wasn’t so practical and secure because your family member had no recourse—the loan wasn’t reported on credit (which if you are on time with payments, helps you build credit, too) and there were little assurances besides a promissory note and your word that the individual would get his or her money back. Talk about risky business.
In Chapter 4, I talked about a personal experience with my husband’s family member who ripped him off with a business venture. Due to keeping everything so informal, my husband had little recourse—then and still to this day.
Today, though, there is one particular online system that makes this transition easy, and that is Virgin Money. Virgin Money, created by Richard Branson—the same brilliant individual who founded Virgin Records, Virgin Atlantic airlines, and Virgin America airlines—came up with this novel approach to officially loaning money to your friends and family, and receiving money from your friends and family.
With Virgin Money, you can have the payments automatically made from a checking or savings account, and your family member can report the loan to your credit and even hold collateral.
Although Virgin Money will handle everything from student loans to retirement loans, the short and simple version of how Virgin Money handles business loans is this:
You find a friend or family member willing to lend you the amount of money you need to launch or grow your small business. You contact Virgin Money and they literally handle the rest.
Below is an excerpt from Virgin Money U.S. that helps to define what they do to help small businesses and consumers and to help with business loans. It costs between $100 and $300 depending on what you want them to handle, including credit reporting:
“Whether you’re looking to finance your friend’s startup, or expand your own business, use Virgin Money to manage your loan. We’ll provide the documents
and support you need. So read up on our products, give us a buzz, or have us send you a guide. Now let’s get down to business, shall we?
Virgin Money manages business loans between relatives and friends. Using us means that the business of your loan—legal documents, transfer of payments, year-end reporting—will be taken care of. (Which we think will come in handy, because, really, you’ve got enough on your plate.)
Virgin Money business loans are flexible, fast, and fit your financial needs.
When you use us, grace periods and deferred payments are easy. It’s up to you and your partner. You pick the terms; we create the documents and manage repayment. Not sure about lending? Need advice on how to ask for a loan? We can help. Request a guide. Call one of our specialists. We try to please.
Our goal is pretty simple. We want to make friend and family financing a real alternative for startup and growing businesses. We offer a top-notch small business financing option, protecting both money and personal relationships. Hey, we didn’t say it was a small goal. But we like to aim high.”—Business Loans (Virgin Money, 2008)
Sound easy? That’s because it is. Not only is going through Virgin Money easy, but it will provide both you and your investor(s) a sense of protection, and lessen the potential for any awkward moments, which can arise when combining friends or family and business matters involving money!
3. Venture Capitalists
Venture capitalists are groups of investors who come together with a common cause—their own business that invests in others’ business ideas. Many dot-com organizations were created and founded on venture capital (VC) money. VCs will require many things from you, but all of it is doable and VCs are a good source. VCs usually lend others’ money or pooled money, and not their own. If they lend their own money, they are referred to as angel investors and not venture capitalists. VCs are usually much more strict and will have more significant guidelines and requirements than angel investors will.
First, you need a well prepared business plan with a one-page executive summary. Generally each VC group will have their own submission guidelines, which you can typically find on their website or have mailed to you by contacting them directly, should they not have a website. They will initially read the executive summary—and then the rest of the business plan if the summary is solid and piques their interest. To quickly expand on “piquing their interest”—I say this because even if your business plan is solid, if it is not a field of business that they typically want to invest in, they could turn you down on the basis of that fact alone. VC firms, like angel investors, will often only invest in a business that they “know” or know enough about to make an informed decision as to whether or not your plan and projections are viable.
What kills a VC deal? Many VC investors say that many business owners come in not even being able to answer simple questions like “How much money do you need?” or “Who is your target market?” You need to know your business! Like I mentioned a moment ago, the VC firms you present to most likely invest only in particular types of businesses, which means that you are dealing with an educated bunch of people. If you don’t know your stuff, their confidence in you will drop tremendously, as will their willingness to back you financially.
So how do you find VCs in your area? A simple Google search to see who has funded similar types of business is a good place to start. My recommended search criteria are precisely this:
“venture capitalist AND <insert business genre>”
What do you need to do to prepare? First, you shouldn’t even think about approaching a VC firm without an extremely thorough business plan, chock full of market research, unless you have the cure for diabetes or something similar. Next, as already noted, you will need an executive summary—in some cases the venture capitalist will want to see only the executive summary before meeting with you about the rest of the plan. Each will have their own rules to live by.
If your business plan makes it past the initial review, you will likely be called in for an interview, allowing you to present your business idea as well. Make sure you walk into this meeting well prepared. Call it cramming, call it rehearsal, call it what you want—practice, practice, and practice some more. You don’t want to find yourself at a loss for words or without an answer to a question. Remember, there is a very high likelihood that they already know the answer to all of the questions they ask you. They are asking you to see if you know the answer.
Lastly, dress for success, even if this means you have to go out and purchase a new designer suit for the “big day.” Although it would be nice if the world operated under the theory of “never judge a book by its cover,” it simply isn’t so. Imagine if someone came to you asking for money wearing a tie-dyed shirt and gold pants, versus a nice three-piece suit.
There are some upsides and downsides to VC money that I feel obligated to mention, in the interest of full disclosure.
The advantages are as follows:
- The VC firm has a fairly constant influx of financial resources
- The VC firm will be able to provide highly trained and educated management and personnel resources
- You will have access to market expertise that you may not otherwise have available
The disadvantages are as follows:
- You will likely have to forfeit some managerial control, even to the point of not being a part of the management team at all
- You may have limitations, with regard to operations or growth, or both, placed upon you by the VC firm
- Your preferred exit strategy may not align with the VC’s idea of the best exit strategy
There are many other nuances to venture capital, and there are terrific web resources in the Resources section of this book on the topic. A great place to start your search for additional knowledge is www.AskTheVC.com. Another resource is the National Venture Capital Association, which can be found at www.NVCA.org. You can start your search for VC firms at www.VFinance.com, which is a directory of active venture capitalists.
4. Small Business Administration
The Small Business Administration, or SBA, doesn’t actually lend money, as we have discussed. But they are an invaluable resource to you, as they will connect you with lenders that specialize in small- to medium-sized business loans. The SBA acts as a guarantor to the lenders that they work with.
The SBA specializes in helping small businesses secure funding when traditional funding outlets are not viable or have been exhausted without success. The lenders that the SBA works with have considerably more lenient lending practices than your traditional bank, but this does come with the potential downside of not being able to secure the amount of funding that you may need. In this case, you may need to secure more than one loan.
Let me stress the fact that the SBA themselves do not have funds to loan. They match you with private-sector lenders, which are in turn guaranteed by the SBA.
Most lending institutions are familiar with the various SBA loan programs, so you can contact your local bank or credit union to inquire as to whether or not they offer SBA-backed loans. A more direct route to take is to contact your local SBA district office and request information on local lenders offering SBA loan programs. They will usually be able to provide you with a list of qualifying institutions in your area. To find your local SBA office, visit sba.gov/localresources/ index.html.
You need to be prepared for your SBA loan application, too. You need to bring, at a minimum, your financial statements, business plan, personal identification, your business identification and documentation, as well as your business license. Various banks will require different documentation.
So what banks work with the SBA? Most major banks and even smaller ones that have business checking. Some of the larger participating banks include Bank of America, Citibank FSB, Wells Fargo Bank, Washington Mutual Bank, and many more. To find out what other programs and resources the SBA has to offer, you can start by checking out their website, at www.SBA.gov.
5. Bank Loans
Once you open up a business checking account with a particular bank, your chances of getting a line of credit or a bank loan for your business is much greater. Often this comes in the form of a business credit card, particularly one with a high limit and low interest for a period of six months to one year. For instance, I earned a line of credit on an LLC about one year after opening my business checking with a $30,000 line and 0 percent interest for 12 months. This is a great way to get seed money to grow your business. Some use this money to expand into another business venture; be sure you record this carefully for your accountant if you decide to do so, because that transfer of funds must be recorded in your accounting and tax files.
To get a bank loan, you will need an official business with your business documents filed, and you will need to bring profit and loss statements. You may need to secure the loan with personal credit depending on how established your business is.
Source: Babb Danielle (2009), The Accidental Startup: How to Realize Your True Potential by Becoming Your Own Boss. Alpha.