Raising Capital

You have a great idea. After starting a business to put the idea into action, you need more cash funding to move the business where it needs to be.

There are many avenues to get your funding but which avenue should you choose? Which avenue of funding has a higher "cost" than the other?

This is the usual dilemma faced by a startup company. Unless you have a rich relative who loves you and would just give you his/her money for nothing, you should take the time to think which funding options suits you best. Which source of funding will cost you more in terms of equity in the whole business or interest charged? Which funding options would put your personal assets at risk when the investor tries to recoup the losses in case the business fails.

First of all, you will need to realize that the business is yours and you have an obligation to ensure that the business does well. For most entrepreneur, they will use their own funds to jump start the business.

There are some options on how you can do this.

Sell Assets - you can sell things that you do not need or can probably do without but with enough value to raise substantial amount of cash. For example, most people will sell their new car and trade in for an older one. Refinancing your Home - For most people, their homes are the single most valuable asset they have. You can refinance your home to raise some cash. Alternatively, though somewhat drastic, you can sell your home then move in to a smaller one and raise some cash in the process. You may also have a lower mortgage which is good thing anyway so you can allocate more funds to your business. Obtain Cash from your Insurance Policies - If you have a life insurance, one way to get funding will be to cash in on these policies. If you cash in on your policy, the policy is still effective provided you continue to pay for the premiums when the payments are due. However, if you pass on with the loans not paid in full, the benefits might be diminished depending on the policy. Your insurance agent or company should be able to provide you more details. Family and Friends - For some entrepreneurs, family and friends provides their initial funding though its true that there are certain liabilities if the venture did not work out as expected. Unless your family and friends are accredited investors, this type of investment can sometimes land you in court if not done properly. In fact, it would be a good idea to check with your attorney about this to ensure you do not violate any securities law by obtaining funds from non-accredited investors. Here are some steps you can take to protect everyone involved. First is to have all agreements in writing so that you can refer to it in case dispute arises. Second, insist that the funding is a loan instead of equity (ownership) so you do not have to worry that they interfere in the running of your business. Taking cash from your Investments - For example, you may choose to take some money from your retirement fund such as the 401(k) retirement plan in case you are currently employed. The interest rate is about 6% with a specified repayment schedule. However, the downside is that if you lose your job, you must repay quickly within 30 days. Credit Cards - Getting funds from your credit cards is a quick and convenient solution. This is considered a cheap option because for a small amount of money per month, you can borrow a large sum of money. There is a disadvantage to this option. If the business does well, all is good. If the business goes down, your personal assets becomes vulnerable to repossession by the banks. Of course, once your business is doing well and operating for a few years, other investment options opens up.

At this point, it would be a good idea to seek the help of your accountant and lawyer for more options. Some accountants may also help you to schedule the funding so that your business will always receive adequate cash flow. We will cover this in another section.

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