Raising Finance

On this page, I hope to point you to some ideas about raising finance for your project and some of the pitfalls in getting the finance. Where will the money come from? There are normally three components:-

1) Bank finance (1 bank or several)

2) Grants and Government Assistance

3) Your cash or assets, (Land, Property etc.).

It is possible that the bank will finance the project but only usually, where the person involved (yourself) has a record of substantial investments or transactions with the bank.

Generally Banks want to see that you are are risking everything possible, particularly if you do not have a history with the bank.

Detailed information on raising finance is dependent on country, culture and business relationships and is beyond the scope of this site. Although in the next few paragraphs, I will try to outline the options and my own experience with the main options for raising finance.

Self-Financing

Of course this is the most desirable situation with a small project, for example a one-man band or internet project, you are in control and own everything. I would still recommend however completing a business plan, the fact that you complete a plan provides a high value education into what is and what is not profitable and assists you in setting realistic targets, it is also an invaluable education into business, profit & loss, balance sheets etc.

Bank Loan

Generally, banks will loan to viable businesses and if you have a track record with the bank you are hoping to raise a loan from then they will normally look favorably on your application.

However, make sure you ask for sufficient capital from day one. Returning to do an Oliver Twist, and ask for 'more', sets the bank on an alert that something may be wrong with your venture. Unless the second visit is positive, for example to provide funds for expansion not predicted or cash flow to finance exceptional sales.

In the present banking circumstances, raising finance may be more difficult, although the banks have to make profit, and whilst their selection process may have changed, there will still be cash available for viable well-presented projects.

Venture capitalists

This may be a large company or an individual with wealth although the same principals generally apply, the interest rate is slightly higher than the banks but the Venture Capitalist is usually relatively short term.

This type of financier would need some indication within the business plan of an exit strategy. That is if the V.C. want to get their money back at any time how they will do it.

Normally the VC will take a percentage of equity, the better companies never take more than 49%, and they usually want the management to be in control with their representative on the board or steering committee.

VC's usually target particular industries in geographical areas and if your venture fits in with their plans then it may be certainly worth contacting them.

Equity Investors

If you intend offering shares, (equity), in your venture there will be an increased amount of work and money required in preparation and setting up the company, for larger projects this would be a specialist company, either one of the larger accountancy companies or specialist consultants, these people must complete the Business Plan and offering.

The overhead costs of direct equity participation usually rules out smaller ventures. The exception to this is where you have family or friends or other known person who wish to participate, then this method of financing can be attractive.

Should you involve known people or relatives in the equity then I advise you to make certain things are completed in a formal and legal manner. Whilst 'good old Uncle Arthur' may put money into your venture now, if things turn sour or difficult then close friends and family can quickly turn to legalities to get their money back.

Government and Other Grants

Many governments offer grants, soft loans etc. to small businesses start-ups. Very often, the legalese, conditions and accessibility of this funding is shrouded in mystery, particularly in Asian countries where the announcement of assistance is usually politically motivated and is rarely acted upon.

The best way to approach these grants in most countries of the world is to apply through the specialist agencies or consultants. These businesses are based on obtaining grants for clients and taking their profits from the grant provider.

Never ever, pay someone to obtain a grant for you, unless it is the preparation of required documentation, even then I would be suspicious of his or her actions.

One very useful method of raising finance is to apply for government loan guarantees. Many countries, particularly in Europe have some type of scheme whereby they will guarantee a loan provided to you by a bank. This means that no cash comes from the government department unless the business fails to repay.

At present there are many 'Green' grants, particularly in Europe. For example, I have been involved in a Dutch project where a large processing facility acquired a large percentage of its funds from the government. This being due to a financial aid system to encourage people and companies to reduce the amount of road traffic. The business actually took a waste material normally used by farmers and turned it into a condensed product. Thereby reducing road usage.

Loan Specialists

I have found that through many projects there are many Mr Ten percents in the start-up business world, many of these people are opportunists who wedge their way in between you and the finance providers for a percentage of the proceeds.

There are also people with good contacts in the financial world who can indeed help you secure finance. I would suggest using the latter type of contact if all else fails. Be sure to ask the person offering this service a list of other projects that they have raised finance for, look for references. If you do not then a lot of time may be wasted in meetings, preparation and travel raising finance that does not exist.

There are also brokers who try to find the best financing deal for the startup business. These people do have to work for their commission and can be useful if engaged on a no cure, no pay basis.

Creative Financing

There are many other ways of raising finance for startup projects but many of them are financial versions of perpetual motion. Many use insurance and annuities in foreign currencies but they are normally breaching some type of law or regulation.

I would suggest not engaging in these deals, the old adage 'If is looks too good to be true then it is too good to be true' holds good for these methods.