HOW do you raise the start-up capital for your business? This question is probably the biggest problem faced by those who want to become an entrepreneur.
Some of my friends have said if they had enough capital, they would quit their jobs and put up their own business. I also faced this obstacle as an employee years ago.
Through the years and several businesses later, I’ve discovered there are actually many ways to do this. Some are easy; others are not. Some are quite obvious while others require creativity and due diligence.
I hope the following ways can help you raise the capital you need to become an entrepreneur.
1. Your own savings. The most obvious way to get your start-up capital is to save money. Be frugal, live below your means and pay yourself first. The advantage of this method is that if your business fails, you’d owe nothing to anybody; and you have no financial burdens to worry about.
This method could take a long time before you finally have enough money saved to start. This approach is recommended for those with very low-risk tolerance and are not in a hurry to start a business.
2. Liquidate assets. A friend of my father sold their old family car to put up a photocopying business. Depending on the amount of capital you need, simply look around the house and sell whatever you have like gadgets, jewelries, furniture or appliances.
You can also ask your broker if you can liquidate some of your paper assets or withdraw from your mutual fund or time deposit accounts.
3. Earn extra income. We often look for ways to earn extra income only when we are in financial need. What many people don’t realize is that finding a second job or working on a sideline is a great way to raise capital for your dream business.
Assuming that your current employment can cover all your financial requirements, then the profits from your extra ventures can all go straight to your start-up fund. Going this route can be time consuming and exhausting but it’s relatively faster than the previous methods.
4. Take out a personal loan. A personal loan is something you can leverage on, especially if you are employed. Depending on your credit history and employment status, some banks and almost all credit card companies are willing to offer these types of loan without much hassle and without collateral.
Additionally, these salary loans are available through the Government Service Insurance System and the Social Security System. Meanwhile, microfinance institutions can also provide non-collateral personal loans to those who can present to them a sound business plan. Inquire from government agencies about these micro-financiers.
5. Apply for a bank loan. Bank loans are also a viable option to raise capital for your business. Although the interests are much higher than personal loans, the financial strength of banking institutions allows them to provide you with a larger loan amount for your medium scale business ventures. Be ready to give them a good business plan and collateral for the loan.
Ask your bank if they offer business loans. Do a brief research to identify SME-friendly banks.
6. Use credit cards. Credit cards can easily be used to gain some business capital. Avail a cash advance or make the necessary purchases for your startup venture. If you always pay your credit card bills in full every month, your credit limit could go as high as P250,000 in a couple of years.
However, purchase what you need after your cut-off date so you’ll have more time to save. Likewise, remember your due date and not forget to pay your bills.
And since you’ll be paying around 3.5-percent interest per month on your credit balance, it’s essential that your business generates enough income to cover for the payments and these charges.
7. Check rediscounting. Lenders that offer check rediscounting are easy to find. This method requires you to issue post-dated checks in exchange for its amount in cash less the interest. For example, at 5-percent interest, you’ll receive P19,000 if you issue a check worth P20,000. Rates and length of payment dates vary for different lenders.
Although less advantageous than using credit cards, check rediscounting is a good option for short-term business cashflow needs and small-business capital requirements. Again, make sure that you’ll be able to generate enough money to clear the check on time.
It’s also good practice to have backup plans just in case you don’t earn enough money to cover the check amount. You can prepare frozen assets for selling or ask friends for help.
8. Borrow money from family and friends. One advantage of doing this is that most family members and friends are usually willing to lend money without or with very little interest. You can also enjoy more flexibility on your payment terms.
Remember though that you are putting your reputation on the line if you go for this method. So do your best to pay on time and, if your business earns more income than expected, give back a little extra as gratitude for their trust.
When talking to them, be straightforward and honest with your intentions. Do it professionally and present a business plan. Produce a contract stating the agreed terms for the loan and payment.
Be clear that you’re merely borrowing money from them and they will not legally own part of the business. Some people might think that because they lent you money, they instantly become investors and can actively participate in the business.
9. Form a joint venture. You can also consider making family members and friends a part of the business. Create a team whose strengths and expertise complement each other: a partner can have good accounting skills; another is proficient in sales and marketing; and, one is a legal expert.
Unfortunately, many friendships have also been strained when things go wrong or become difficult. It’s important that from the very start, each one understands the amount of work that needs to be done and is willing to go the extra mile to make the business successful. Also, be sure to clearly define the responsibilities, boundaries and jurisdiction of each partner in the business. Lastly, write everything on paper including the options and terms if ever one partner chooses to leave the business.
10. Seek a venture capitalist. Also called an “angel investor,” a venture capitalist (VC) is willing to pay for your startup in exchange for part ownership or royalty fees from the business.
One major advantage of doing this is that you could further tap the VC’s extensive network of partners to help enhance your business. However, do remember that you’ll most likely lose free rein over running your business because certain decisions will need to be consulted to the VC before they can be implemented.
Always have an elevator pitch ready just in case you bump into one. You can find VCs in online forums and websites.
Whichever way you choose among these ten, having a good business plan is always an essential tool. It will help you ensure that your business will be able to pay your creditors on time and, more importantly, convince investors to join your venture.
Fitz Villafuerte is registered financial planner of RFP Philippines. To learn more about personal-financial planning, attend the 104th RFP program this October 2023. To inquire, e-mail email@example.com or text at 0917-9689774.