How and where to get the sources of capital to set up the business

No Capital = No Business

Source:  Personal Financing

Every business ventures need capital. While capital is needed throughout the life of a business, the new entrepreneur faces significant difficulties in acquiring capital at start-up. Before seeking outside financing, an entrepreneur should first explore all methods of internal financing, such as using profits, selling unused assets, reducing working capital, obtaining credit from suppliers, and collecting accounts receivables promptly. After all internal sources have been exhausted; the entrepreneur may find it necessary to seek additional funds through external financing. External financing can be in the form of debt or equity. When considering external financing, the entrepreneur needs to consider the length of time, cost, and amount of control of each alternative financial arrangement.

 

Source: Commercial Bank

Commercial bank loans are the most frequently used source of short-term external debt financing. This source of funding requires collateral, which may be asset-based or may take the formed cash flow financing. In either case, banks tend to be vigilant about lending and cautiously weigh the five Cs: character; capacity; capital; collateral; and condition. Not every entrepreneur will qualify under the bank’s careful scrutiny. When this occurs, an alternative for an entrepreneur is the Small Business Administration Guaranty Loan. The SBA guarantees 80 percent of the loan, allowing banks to lend money to businesses that might otherwise be refused.

 

Source:  Limited Partnership

A special method for raising capital or high-technology firms is a research and development (R & D) limited partnership. A contract is formed between a sponsoring company and a limited partnership. The partnership bears the risk for the research, receiving some tax advantages and sharing in the future profits, including a fee to use the research in developing any future products. The entrepreneur has the advantage of acquiring needed funds for a minimum amount of equity dilution while reducing his or her own risk in the venture. However, setting up and R & D limited partnership is expansive, and the time factor (at least 6 months) may be to long for some ventures. Restrictions placed on the technology as well as the complexities of exiting the partnership need careful evaluation.

 

Source: Government Grant

Government grants are another alternative accessible to small businesses through the SBIR program. Businesses can apply for grants from 11 agencies. Phase 1 awards carry a stipend of up to $50,000 for six months of initial research. The most promising Phase 1 project may be eligible for Phase 11 support of up to $500,000 for 24 months of research.

Source: Individual Investors

Lastly, the entrepreneur can look for private funding; Individual investors often require an equity position in the company and some degree of control. Look for individual investors that have the same interest in the business. Otherwise it won’t work. Look for individual investors that would help grow the business so you do not have to cover all expanses.

Try to cultivate a variety of funding sources, which can help you fully execute your business plan and prevent (or at least limit) resource constraints. Don’t stop raising money. The window for financing can be very narrow. You must be able to capitalize on funding when it is available. To obtain capital, one must have a dominant position in the field or some defined market niche, a good product or services, a well-written business plan with defined mission, and a management team with a track record, because it is the what and who that investors are looking. Remember due diligence goes both ways.

 

Wan Rosnah