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The 1990s are over, and venture capitalists and angel investors are not dumping money into half-baked business ideas anymore. The “dot com” craze is basically over.
Banks aren’t crazy about lending money to anyone either, especially start-up companies. However, that doesn’t mean that new businesses can’t get the funding it needs.
If you’re starting up a business, there are still a few ways for you to raise capital and grow your portfolio as an entrepreneur.
Bank Loans Banks aren’t lending like they used to, but they do still lend money to some companies. The key to getting money from a bank today is to show a solid track record of success. It helps if you already have funding from some other source, or if you’ve put a substantial amount of money into the business already. By showing the bank that you’ve contributed substantial capital to the business, you’re showing that you’re serious about making the business work. Having your own money into the business, and coming to the bank with some measure of success already, also shows the bank that your business is viable.
You’ll still need a cash flow statement to show the bank, and a solid business plan – especially in today’s economy. Banks cannot afford to take substantial risks, so if you come to a loan officer with an unproven idea, don’t expect to get the funding you need.
Venture Capital Venture capitalists are investors that will help you by providing the funds you need. Usually, the VC wants to become a partner in the business in exchange for lending you the money. The VC also wants to be repaid, of course, but will take a percentage of your profits. To attract VCs, you have to have a good exit strategy, and you have to show your potential investor several other important qualities:
Experience – VCs want to know that you have experience in the business you’re asking him to invest in. The days of investing in a 19 year old computer whiz with no “real world” experience are over.
Customers – You don’t necessarily have to have customers, but you have to have an explanation of why customers would want your product. Why would they pay the price you’re asking them to pay? Would customers tell other people about your product or service? Why? If you don’t have answers to these kinds of questions, don’t expect to be funded.
Team – You have to show a VC that you are working with a good team. The entrepreneur is important, but his team is also crucial.
Opportunity – Investors want big ideas, not small ones. Your idea has to be big enough that it could change the world. If you don’t have a $100 million idea, forget it.
Business Model – VCs want a business model that’s profitable. If someone sat down to trace where every dollar of revenue comes from, would it be easy to understand? Would it be clear how the company makes money? Is the business “expandable?” Is it “repeatable?” Will it create predictable cash flow?
Factoring Another way for you to raise money is to factor your accounts receivable. If you have unpaid invoices that are impeding cash flow, you can sell these invoices to generate the cash you need right now. Factoring companies will buy your invoices for 70 to 85 percent of the total value of the invoice. They then charge a fee for advancing you the money. While this sometimes results in an expensive funding method, factoring can create cash literally within a week – faster than any bank loan or VC deal.
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