How can you raise money to start your business? [2006]
- Date : (2006-05-27)
- Author : SAIE
How can you raise money to start your business?
Profile In 1998, a new wine label hit the shelves under the name of New Beginnings. The newcomers were a co-operative winery consisting of 16 labourer families. They had been given land by their former employer, Alan Nelson of Nelson’s Creek winery in recognition of their hard work. With help from Nelson, the members of New Beginnings struggled for three years to get their first batch of wine on the market. Their first efforts were rewarded with success and the families soon wanted to expand. However, they were painfully aware of the dangers of getting into too much debt. One bad season and they could be out of business for good. Shunning the traditional route of raising capital from a bank, they came up with a very creative way to raise the money they required. They launched an “adopt-a-vine” project to raise funds from members of the public. This clever idea gave people the opportunity to “adopt” an actual vine for a fee. In return, each new “parent” was allocated an individually-numbered grape vine. They also received a first release bottle of wine encased in a hand-crafted wooden box, a certificate of adoption and a photograph of their vine. Talk about a creative solution to their money problems!
Where can I get financial support? Perhaps one of the biggest barriers to starting your own business is lack of finances. How do you raise the necessary capital to get your business off the ground? Let’s take a look at some of the traditional ways of raising capital 1) Business loans. Don’t even think about approaching a bank for a loan without a business plan. Money-lenders need to know that you are serious about your business and where it is going. Business plans will be covered in detail in the next issue of Jet Club magazine. 2) Selling assets. Do you have something of value that you could sell? Perhaps a car, a valuable piece of jewellery, computer, stamp collection or artwork? Do you have investments you can cash in such as shares or unit trusts? 3) Bond extension. Do you own property against which you can borrow money or have your bond extended? Obviously this is a risky measure as you could lose your house if your business goes under. 4) Using your savings. Have you got any money saved, or can you use your pension if you’re leaving a job to start your business? 5) Borrowing from family or friends. Do you have family or friends who may be willing to loan you the money you need? You could offer them shares in your business in return. Make sure you agree on the terms of the loan, ie: when you intend to pay the money back and how much interest you will pay them. 6) Getting a partner. Perhaps you know someone with cash to invest in your business. They can become active or silent partners in the business. Make sure that you protect yourself by drawing up a legal partnership agreement, which can be done at your bank. 7) Venture capitalists. If your business idea is big enough with great growth potential, or you intend opening up a franchise, then you could approach venture capitalists. They can either invest in your business in return for shares in the business or a percentage of your profits, or they can loan you the money with a set interest rate and period of repayment.
Alternatives to raising capital If you are reluctant to try any of the above options, then consider the following alternatives: 1) No capital required. If borrowing money gives you nightmares, then you could always find a business which will not need much capital up front. You can then save a part of your profits to raise whatever cash you need to expand and grow your business at a later stage. 2) Start small. By starting small and working from home or from the premises of family or friends, you can avoid having to raise large sums of money. Again, you can grow your business by putting your profits back into your business. 3) Apply for grants. If you do your homework, you could find non-profit organisations or government departments which are willing to provide grants for new business start-ups. 4) Get creative. With a little thought, you could try a number of ways to raise the money you need to start your own business, just like New Beginnings did. Perhaps you could get a part-time job to earn extra money. Perhaps you could clear out all your junk and hold a garage sale. Or you could auction off a share of your business to the highest bidder. Or perhaps you could get donations from businesses or individuals for participating in a sporting event like the Comrades Marathon or the Duzi Canoe Marathon.
Whether you need to raise a lot or a little bit of capital, remember that where there’s a will, there’s a way. When borrowing money, borrow what you are comfortable with – it’s no good spending all your time and energy worrying about repaying the loan. Risk is easily managed if you don’t get in over your head.
In the next issue, we will show you how to write your own business plan.
