How Do I Raise Money?

the juice

Filling Your Cash Funnel

Fundamentally there are only three ways to get money into a new business:

At the start of a business you may need funds before the point where you can make sales, which means the money is either going to come from you or other people.

Your Money

As a new outplacement client it’s possible that you have a redundancy payment that has given you some financial freedom. Are you willing to put some of this money at risk in a new business?

Maybe you also have savings that you could use to fund your start. Even if you are not going to lend this money to your new business you will probably have to live on this money until the point where your business can start to pay you an income.

A good first step is to draw up a survival budget so that you know to the last penny your minimum survival needs. Once you know this figure you can calculate how much of your savings / redundancy you are likely to use up during your start up phase.

See the later Business Expenses section for a survival budget template or use the one in the free manual you get when you join the mailing list.

Other People’s Money

Contrary to popular belief about raising money, there is money everywhere and plenty of people willing to lend you some of theirs. Although the more you want, the more convincing your arguments have to be. Here are a few examples:

Talking to lenders

Getting money is not a problem but you need to remember a few common sense tips.

What would you need to know if someone asked you for a very large loan? Imagine that I asked you to lend me the entire value of your house, your savings and any redundancy payment for my new business. What would you need from me to convince you that this was a good idea?

I’m sure you’d want to know:

Lenders think very clearly. How much do you want, what will you do with it, what is their likely return, how safe is the proposal? Generally, the more you want, the more rigorous your answers have to be.

Know Your Numbers

Potential investors will want to see that you know your numbers. Your bank may well offer to match your funds - you put in £10k and they lend you £10k. They are often willing to do this on the strength of an interview and a look at your business plan.

Unfortunately you will also have to sign a personal guarantee for the money but the experience itself is nothing like the terror of appearing on Dragon’s Den. If you want to borrow more, with more risk, then it is really important that you can demonstrate clear numbers and a sober analysis of your markets to back up the assumptions you have made.

Remember that you are borrowing other peoples’ money, it is not a grant, so they want to see that you will give it back with a decent return on their investment.

Write a clear plan

There is a lot of mythology surrounding business plans but they are actually very simple. If you can answer the above questions in a convincing way, that stands up to scrutiny, then you are well on your way to borrowing money. The actual format of the plan will vary from lender to lender. A good place to start is with business plan templates given away by the big four banks in their business start-up packs. See How Do I Write A Business Plan

A convincing plan does not have to be long or dense but it must show the following:

Remember that investors who are willing to take risks, like venture capital investors, will be looking for a 10x return plus a significant share of your equity. This means you effectively give away the future stream of dividends on this money.

Show your proposal to someone who will be kind, not critical. Then show it to someone who will be critical and not kind.

Grants

You may be able to gain grant funding depending on your location and the type of business you are planning. If you are under 25 The Princes Trust may give a small start up grant. Unless you have no other way of raising money, chasing grant funding can soak up a lot of time and attention better focused on finding customers. This may be something that your accountant is willing to spend some time on for you. You should also ask your local Business Link adviser about grant opportunities for your type of business.

Money From Customers

Although debt finance is very fashionable with bigger companies you ought to try to move as quickly as possible to funding from customers so that you use sales and retained profits to fund your business. See the next section for some advice about the right price to charge.

Collect Debts More Quickly

Make sure you are tracking your outstanding invoices and have a systematic approach to chasing payment. Consider incentives to pay early.

Only Discount For Cash Flow

If you are selling your time for money it’s important to resist discounting as much as you can because once that time has gone, you cannot get more of it. You may value cash in hand though so you could structure your prices to encourage early payment by, for example, selling lower priced packages that have to be paid for in advance.

Credit or HP agreements

To persuade your clients to pay you earlier or more regularly consider offering them credit agreements, hire purchase or continuous credit card deductions. These things are relatively simple to set up and you can copy bigger businesses by giving a small discount for direct debit payments. These are relatively cheap sources of raising money.

Factoring

Factoring means selling your invoices to a “factor” who will give you a high percentage of their face value now and take a small fee in the process. Sometimes they will also take over collecting the debt from your clients - you might not want them to do this. The big advantage is cash in hand, now, when you need it.

Action

It’s important to understand the impact of the type of money you are raising. This table summarises the different approaches. (see The Red Stuff Handbook for the complete table).

Working Capital Loan Capital Share Capital
Where from? Collect debts more quickly; Give customers incentives to pay early; Factor your invoices for early cash Borrowed from anyone who will make you a loan Business angel finance; Venture capital funding; All want some of your shares as a guarantee
Consequences Cheapest form of raising cash Unsecured loans become a debt; Secured loans put the item of security (your home?) at risk. You have given up not only part ownership of the business but all the future dividends paid on those shares. Do not surrender control

From the experts

Watch Guy Kawasaki talk about how to make a venture capital pitch in his very funny talk The Art Of The Start. And watch the hyperactive David Rose (The Pitch Coach) give some hard headed advice at TED.

Grab these two audio files, Guy Kawasaki reading from his book The Art Of The Start. Raising Money. How To Pitch.(Right-click to download).

Play Now - Guy Kawasaki - Raising Money

Play Now - Guy Kawasaki - How To Pitch

Links For Raising Money

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