Written by Dermot Berkery, an internationally known venture capitalist with Delta Partners, this complete toolbook thoroughly details how venture capitalists arrange the financing for a company; what they look for in a business plan; how they value a business; and how they structure the terms of an agreement. Within its pages, you'll find everything you need to successfully raise new business capital with the most attractive terms possible.

Small Business Financing Involves both Raising and Managing Money

Exclusive Focus on Fund Raising Alone Can Leave You Short of Money Again Soon

For a new small business, financing involves:

Raising money to set up the business
Raising money to run the business till the business begins to generate cash surpluses, and
Managing the money in the most productive manner

New entrepreneurs might focus on the first of these alone, assuming that the business will begin to pay for itself once operations start. Very, very few businesses do that. Most new businesses have an initial "gestation" period during which sales levels will be too low to meet all expenses in full. Businesses have to incur expenses like rent, utility bills, travel expenses and so on from day one.

It requires time to achieve levels of sales to generate adequate cash surpluses. The business has to market itself effectively in a sustained manner to grow its sales levels.

Managing money productively makes available funds go as far as possible. Productive use means spending money wisely on key activities such as marketing, quality control, and others that lead the business to success.

Let us now look at the major sources of business finance, and how to raise funds from outside sources.

Sources of Small Business Finance

The main sources of finance for funding your small business are:

Your Savings: If you have been working for some time, you might have accumulated some savings. Consider how much of the savings you can spare for the business venture. You might need some funds for living expenses while you are establishing the business, unless you or your spouse has a secondary source of income.
Your Bank: If you have a good relationship with your bank, and can come up with a reasonably complete business plan for a viable business, your banker can help you. This help can extend both to developing the business plan further and funding your small business.
Other Lending Institutions: Credit unions and other institutions might also be willing to provide small business funding if your business plan looks good to them. Find out the formalities involved and their decision-making processes.
Government Support: Government agencies, including your local government, often announce special programs to assist businesses. Check out whether you qualify for assistance under any of these programs. Don't become obsessed with getting government grants, however. You might find yourself ineligible after spending months chasing a grant.
Venture Capitalists: This option is for innovative businesses that promise high returns. Venture capital is more easily available to such businesses if they have already been set up and shown the potential for fast growth if funding is available.

We will look at each of the above options in more detail in separate articles. In the next section, we look at a general approach for successful fund raising from outside agencies.

How to Go About Raising a Loan

Unless you are borrowing funds from a relative or friend, who might be willing to make the loan on trust, you will need to go about your fund-raising campaign in a certain way.

Develop a Business Plan: Explain in writing what business you plan to set up, the competition you will face in this business, how you will market your product or service, what facilities are required for the business and how much these will cost. Supplement these with realistic projections of your sales and profits in a Profit & Loss Account format and estimated financial positions in the form of Balance Sheets. Conclude with a Cash Flow statement showing cash inflows and outflows, and showing how you will repay the loan.
Identify a Collateral You Can Offer: Bankers and lenders would be more willing to lend you money if you can offer a security in such forms as property, life insurance policy or other financial asset. Alternatively, you can seek assistance from government agencies that might be willing to provide a guarantee to the lender that your loan will be repaid. The government agencies will look at how complete and realistic your business plan is.
Demonstrate Your Creditworthiness: If you have a good credit record, show it. Mention any other things that will go to show that you are a person who takes financial commitments seriously. Lenders look both at the character and demonstrated competence of the borrower.
Explore Alternative Sources: Even if your funding application is rejected by one lender, that does not mean every other agency will do the same. Lenders have different ways of looking at things, and might be in differing situations, so that what is not acceptable to one might be acceptable to another.
Review Your Experiences: If you have to approach more lenders, find out why earlier lenders rejected your proposal. You might then find ways to remedy any serious problems and present a more acceptable proposal to the next agency.

And Don't Forget About Managing the Money Well

Spend money only on essentials, such as establishing a good marketing set up, acquiring the facilities needed to provide acceptable quality products or services and locating your business at a right, yet economic, location. Explore alternatives in each case. You might be able to find better bargains or options by looking around.

Monitor your project's progress. Delays can push up costs, and cause you to miss business opportunities.

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