4 ways to raise capital for your business or idea
Before we get started, it is important to know that you need patience, persistence flexibility and resilience when sourcing for funds. I know it seems like a lot of grammar so in plain English, it means money doesn’t fall down from the skies. You need to earn trust to get it. Let me show you how.
There are 4 smart ways to raise capital for your business or idea.
- Get investors on board. It is easier to get investors onboard for an existing thriving business. This means you already have a business but you need more money to expand the business. Investors generally will have more confidence to invest when you have proven you can run a business successfully. There are different types of investors you can approach. It can be an angel investor, a venture capitalist or more. An angel investor is more of an informal business angel or private individual who is affluent and can provide capital in exchange for ownership equity. A venture capitalist is also similar except it is a more structured establishment
The biggest way to convince them is to make a fool proof business plan and show the benefits they will gain with a business plan. Your business plan is the document that shows you are grounded in your business understanding. The business plan contains:
a. the business concept and background: that details the industry, the major competitors, growth potential e.t.c
b. The market: Here, you thoroughly describe the market that exists for your product or service.
c. The product or service: Describe the product or service you are offering. What is important here is to identify your unique selling point. How are you different? How will your product deliver a better experience
d. Business strategy: How do you plan to win in the market? How will you sell your product? What channels? How will you create awareness? How does your price compare with the market average
e. The management team: what is the structure of your organization? What skill set does your team offer?
f. Lastly, but crucial is your financial plan. This is the ‘koko’. How much revenue and profit will your business generate in year 1 and the next 2 years? What is the capital needed for each year? What is the payback period for capital? This means how long will it take your business to generate enough profit to pay back the capital? These are the bare minimum. You can also add your balance sheet and cash flow projections.
When you present the plan to investors, you should be clear on what benefits the investors will get. Example, you should have a capital repayment plan where you commit to how their capital will be refunded. Also, you must generate some interest for the investor. Typically, an investor will demand for at least 12%-15% interest which is the average return that can be made from investments in money market. You can also offer some ownership opportunities in the company. Remember, nothing goes for nothing. All you need is to get a lawyer to document terms of partnership. It is better to own 50% of something than 100% of nothing
- Tap into funds from NGOs/competitions/government/entrepreneurs programs.
Information is power. Don’t be complacent. Consciously dig for more information. For a start, follow mrsceonaija blog, like us on facebook, follow us on twitter. We consistently bring you information about opportunities and funding. There is the Microsoft Lumia competition that just ended where funds are being given for brilliant business ideas, there is The Anzisha Prize, the Ignite business contest, the AYEEN program, the youwin program. This year, we’ve had 2 winners of $10,000 each from the Tony Elumelu entrepreneurs program. So these programs are real and E fit be you o! Keep pushing.
- Bank loans & overdraft: A loan provided by a bank mostly backed up by some form of collateral. Also, these loans attract interest and bank charges. Currently many banks charge between 18%-20% interest on loans. A bank overdraft on the other hand is a shortage in bank account because the account owner is allowed to withdraw more money than what is available in the account.
As a new business, there are some smart approaches to take loans:
a. Be sure your investment of business will generate enough profit to absorb the bank interests & charges. If your bank charges and interest amount to N100,000 per annum , be sure your profit from the business is more than this
b. Get smart collateral: A collateral is any additional form of security which can be used to assure a moneylender or investor that you have a second source of loan repayment. It is the way the creditor protects him/herself. You may not have huge assets such as land, properties to use as collateral for your business. However, you can use some other items such as personal or company shares/stock reports. You can present the purchase orders for the job you are trying to raise capital for. You can use the warehouse inventory or stock of goods you own as collateral. Also, equipment and tools.
c. Have good records: A bank will require your documented financials. They will like to see business records such as your assets statements, your income statements, and your tax evidence. For all these, get an accountant to provide professional advice.
d. Get a good banking partner: Walk into a strong bank that supports SMEs and make enquiries. Be sure to compare interest rates, packages and customer service before making a final banking partner selection
4. Loans from Peers and family: This may seem like a tough option but it is an option that works for some. Consider approaching close peers and family members with your business funding needs. Of course, this will still require some form of documentation to reassure both parties. Consider drafting a simple agreement that should be signed by both parties that will explain how the money will be paid back, the interests, the terms and conditions.