Financing for home based entrepreneurs

A key issue for many businesses hoping to start or grow is the ability to raise financing for the business. Financing your business can be challenging despite so may sources available today and will firstly require a well written business plan. With bank lending becoming less popular with many entrepreneurs, business owners are increasingly turning to alternative sources of funding. As the owner of the business you are responsible for the rasing of finance. Few others in your business will be as committed to the process as you may be.


With the use of the internet, trade publications and newspapers it wont be long until you have a number of possibilities for business financing. However, while venture capital may be overflowing for the Internet start-ups, the real scenario for small businesses (and worse, home-based businesses) is far different.

Then again, business means risk, and success comes to those who focus on their goals and actually do something. You first step should be to start making phone calls -- talking to people, and making appointments to discuss your plans with the people who have money to invest. When you're looking for money, it's essential that you get the word out to as many potential investors as possible.

There are several sources to consider when looking for financing. Don't make the mistake of thinking that the only place you can find the money you need is through the bank or finance company. Explore all of your options before making a decision. These include –


Personal Savings.

The first place to look for financing is right at home and personal savings and assets are the easiest source of capital. If you have money set aside, you use it instead of borrowing or rounding up investors. Or, you can take an inventory of items you do not need and have a garage sale. Most people are pleasantly surprised how much cash they can raise in a single weekend. You can also use your stocks, bonds, pension plans, life insurance policies and real estate to raise the needed capital. Those who own homes oftentimes secure equity loans and use the proceeds to start a business.

However, most beginning entrepreneurs don’t have adequate personal savings to fund a business start-up. Others, on the other hand, have savings but refuse to dip into their piggy bank for a variety of reasons. It may be their retirement money or for emergencies; while others would rather use their savings as collateral and borrow against it at a low interest rate.


Family Members and Friends.

Next, turn to members of your family or close friends who have faith in you and want to see you succeed. Borrowing from a friend or relative is generally the most readily available source, especially when the capital requirement is smaller. Relatives and people you know need fewer assurances and are more open to your ideas than professional investors. They are also more patient if your business takes longer than expected to get off the ground. Offer to repay them through profit sharing.

If you are borrowing from family members instead of asking them to invest, maintain a very businesslike and impersonal procedure. To avoid putting strain on the relationship, it is better to draw up a formal agreement in order to put the terms of the loan in writing. It is important to view the participants as business associates.


Venture Capitalists.

Venture capitalists are professional investors who may be in charge of a large pool of capital gathered from a range of sources. These firms invest in new, even high-risk or speculative businesses without a proven track record, with the potential for rapid growth and high returns in a short time. They generally want equity or part ownership of a business in exchange for substantial returns (25 to 40 percent or more) when they exit typically in three to seven years. Particularly in the Internet sector, several venture capital firms have achieved capital gains of 300 to 500 percent, which are used to offset by a wide margin any losing ventures. These firms are mostly interested in potential projects that require R500,000 or more because of the high cost of investigation, evaluation and administration. While a venture capital firm may receive as many as 1,000 business proposals a year, it will typically investigate less than 10 percent and may actually invest in only 3 or 4 percent.


Angel Investors.

Angels are private investors interested in making more on their capital than they can make through traditional markets such as mutual funds or publicly traded stocks. These “angels” can be your accountant, attorney, doctors or other individuals who seek out new businesses to invest in return for equity ownership. Usually providing additional capital in the range of R25,000 to R500,000, expect angel investors to demand high returns for their investments. Relative to venture capitalists, though, angel investors are less demanding and can also be expected to provide expert guidance and mentor the start-up.

As you explain your plan to them, and ask for their advice, casually ask them if they'd mind letting you know of, or steer your way any potential investor they might happen to meet. Do the same with your banker. Give him a copy of your prospectus and ask him if he'd look it over and offer any suggestion for improving it, and of course, let you know of any potential investors. In either case, it's always a good idea to let them know you're willing to pay a "finder 's fee" if you can be directed to the right investor.

Professional people such as doctors and dentists are known to have a tendency to join occupational investment groups. The next time you talk with your doctor or dentist, give him a prospectus and explain your plan. He may want to invest on his own or perhaps set up an appointment for you to talk with the manager of his investment group

Note, however, that most angels and venture capitalists do not invest in home businesses.

One key to a successful business start-up and expansion is your ability to obtain and secure appropriate financing. Raising capital is the most basic of all business activities. Remember, it takes money to make more money.

Flip open trade publications and business newspapers, and you will be bombarded by reports of abundance of available capital for entrepreneurial start-ups, particularly for the dot.coms. The financial news would have you believe that more money is available for new business ventures than there are good business ideas.

However, while venture capital may be overflowing for the Internet start-ups, the real scenario for small businesses (and worse, home-based businesses) is far different. Capital is hard to come-by, especially if: (a) you do not have a good business idea or business plan that will make rich backers run to you in the hope of multiplying their savings exponentially; and (b) you may have a good business idea, but you do not know anyone who matters. The problem is that most beginning "business builders” doesn’t know what to believe or which way to turn for help.

Then again, business means risk, and success comes to those who focus on their goals and actually do something. Who knows, you may be lucky and dispel stories of “tight money.” You first step should be to start making phone calls -- talking to people, and making appointments to discuss your plans with the people who have money to invest. When you're looking for money, it's essential that you get the word out to as many potential investors as possible.

There are several sources to consider when looking for financing. Don't make the mistake of thinking that the only place you can find the money you need is through the bank or finance company. Explore all of your options before making a decision. These include –


Personal Savings.

The first place to look for financing is right at home and personal savings and assets are the easiest source of capital. If you have money set aside, you use it instead of borrowing or rounding up investors. Or, you can take an inventory of items you do not need and have a garage sale. Most people are pleasantly surprised how much cash they can raise in a single weekend. You can also use your stocks, bonds, pension plans, life insurance policies and real estate to raise the needed capital. Those who own homes oftentimes secure equity loans and use the proceeds to start a business.

However, most beginning entrepreneurs don’t have adequate personal savings to fund a business start-up. Others, on the other hand, have savings but refuse to dip into their piggy bank for a variety of reasons. It may be their retirement money or for emergencies; while others would rather use their savings as collateral and borrow against it at a low interest rate.


Family Members and Friends.

Next, turn to members of your family or close friends who have faith in you and want to see you succeed. Borrowing from a friend or relative is generally the most readily available source, especially when the capital requirement is smaller. Relatives and people you know need fewer assurances and are more open to your ideas than professional investors. They are also more patient if your business takes longer than expected to get off the ground. Offer to repay them through profit sharing.

If you are borrowing from family members instead of asking them to invest, maintain a very businesslike and impersonal procedure. To avoid putting strain on the relationship, it is better to draw up a formal agreement in order to put the terms of the loan in writing. It is important to view the participants as business associates.


Venture Capitalists.

Venture capitalists are professional investors who may be in charge of a large pool of capital gathered from a range of sources. These firms invest in new, even high-risk or speculative businesses without a proven track record, with the potential for rapid growth and high returns in a short time. They generally want equity or part ownership of a business in exchange for substantial returns (25 to 40 percent or more) when they exit typically in three to seven years. Particularly in the Internet sector, several venture capital firms have achieved capital gains of 300 to 500 percent, which are used to offset by a wide margin any losing ventures. These firms are mostly interested in potential projects that require R500,000 or more because of the high cost of investigation, evaluation and administration. While a venture capital firm may receive as many as 1,000 business proposals a year, it will typically investigate less than 10 percent and may actually invest in only 3 or 4 percent.


Credit Cards

Some entrepreneurs use several credit cards to provide a substantial cash bankroll for the business start-up. In fact, credit cards are used by nearly one-third of start-ups. It is relatively easy to obtain, and eases the bookkeeping systems. However, using credit cards to launch a business is the least wise, since credit card money is the most expensive money that you can borrow. If you intend to carry a balance, the annual interest charges (12 to 21 percent) are quite steep. While credit card advances is one of the most commonly used sources for start-up financing, it is dangerously close to gambling.


Small Business Investment Companies

Don't overlook the possibilities of the Small Business Investment Companies in your area. Look them up in your telephone book under "Investment Services." These companies exist for the sole purpose of lending money to businesses that they feel have a good chance of making money. In many instances, they trade their help for a small interest in your company.


Business Development Commissions

Many states have Business Development Commissions whose goal is to assist in the establishment and growth of new businesses. Not only do they offer favorable taxes and businesses expertise, most also offer money or facilities to help a new business get started. Your Chamber of Commerce is the place to check for further information on this idea.



Money Broker or Finder

Organiations such as these normally take your prospectus and circulate it with various known lenders or investors. They always require an up-front or retainer fee, and often may nor be able to guarantee getting you the loan or the money you want. There are many very good money brokers, and there are some that are not so good. They all take a percentage of the gross amount that's finally procured for your needs. The important thing is to check them out fully; find out about the successful loans or investment plans they've arranged, and what kind of investor contacts they have all of this before you put up any front money or pay any retainer fees.

Start thinking about the idea of inviting investors to share in your business as silent partners. Think about the idea of obtaining financing for a primary business by arranging financing for another business that will support the start-up, establishment and development of the primary business. Consider the feasibility of merging with a company that's already organized, and with facilities that are compatible or related to your needs. Give some thought to the possibilities of getting the people supplying your production equipment to co-sign the loan you need for start-up capital. This is truly the age of creative financing.

The truth is this: Now is the time to make your move. Now is the time to act. The person with a truly viable business plan, and determination to succeed will make use of every possible idea that can be imagined. And the ideas I've suggested here should serve as just a few of the unlimited sources of monetary help available and waiting for you!

Investment Rands are not out of the question for a home business, but it isn’t a likely situation unless your business has the potential to gain significant stock value. This also means that your company will need to be larger than just an extension of yourself. To attract investors, you will have to make the case that the business could be sold at some point to another person or company that could pick up where you left off and continue to grow the business. If this is the case with your enterprise, you might consider going through the pain to gain investors, but be prepared to learn how the system works before you send off proposals.