Friday, March 25, 2011

How To Raise Capital For Your Business

Credit markets are tight.
During The Global Credit Crisis of 2008, credit markets literally froze,
as banks refused to lend money, even to each other, as contagion swept
through the markets and Fortune 100 financial institutions teetered on the
brink of collapse. With the exception of Bear Stearns and a few other
companies, the worst was largely avoided, as financial institutions were
falsely propped up by emergency stimulus measures from the U.S.

This riveting madness that hit the markets in 2008 caused banks to tighten
lending standards considerably, and one of the hardest hit sectors of
borrowers was small businesses. Throughout the second half of 2008 and all
of 2009, small business lending was down considerably, and many existing
companies who had been accessing bank credit regularly for years, all of a
sudden could not tap any credit. If this was the case with existing small
businesses with established lines of credit and strong credit histories,
how do you think it was for new small business start-ups? Of course, it
was nearly impossible. In today’s economic climate, it is still very,
very difficult for a small business start-up to access traditional bank

However, just because credit is not available does not mean Americans have
stopped dreaming and creating entrepreneurial ventures. The primary
problem facing many new small start-ups is, where do you turn for cash in
the early stages of business development? In this article, we are going to
discuss a few ways a new business can raise investment capital to bring a
product to market and establish a new business.

Friends and Family
This is the most traditional way to raise money for a business
idea—simply borrow it from Mom and Dad, other relatives, or close
friends. There are definitely pros and cons to doing this. The pros are
that your family will most likely be very excited for you and want to see
you succeed. Also, in many cases they will simply loan you the money, and
they may not want any interest in return, or if they do, it will often be
negligible. Most of the time, family members and close friends are not
going to try to position themselves for an equity stake in the company,
which means you will not have to sell a portion of the company in exchange
for the investment capital.

The obvious drawback is, what happens if the business fails and you are
not able to repay the loan? Is this going to sour a personal relationship?
Remember, it is never worth it to let money come between you and a loved
one. The best way to handle this dynamic is to be fully communicative with
the lender and talk through the possibility of losing the investment
capital. How would the lender respond in that scenario? Would you repay
the loan out of your own pocket in the future, etc? Have a definite plan
in place.

Angel Investors
Angel investors are venture capitalists who aim to fund new start-up
companies in exchange for an equity position in the company. Angel
investors come in many different shapes and sizes. Some like to invest in
companies that are still in the ideation phase, which means the
entrepreneur has an idea for a product and thoughts on how to market it,
but needs the capital to get the product created or manufactured. Other
angel investors like to invest in companies that have already manufactured
product and have a certain level of sales and revenue figures in place.
Most angel investors are not interested in giving you money for stock
trading or the forex trading; instead, they are looking for companies with
competent management and a strong product. These types of investors like
to come in to later rounds of seeding, bring in a fresh injection of cash,
and bring the company to a much higher level.

Angel investors can be found through networking with personal contacts or
through an online search for angel investors in your area. Whichever route
you choose to go, be confident and don’t give up until you have secured
the necessary capital to make your business idea a reality.

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