When purchasing a business, raising capital is one of the most important initial requirements. The key ingredient when raising capital is to prepare a carefully thought-out business plan. The business plan will not only serve to determine initial capital requirements, it will also assist creditors in determining the maximum amount and the terms of financing that will be made available. Once capital requirements have been determined, it is time to act.
Since institutions will typically only provide 80% to 90% of a purchase, many business purchasers will need to use a combination of alternate sources to raise the required capital. Listed here are 20 effective methods of raising capital. These methods range from simple to complicated and sophisticated
1. Personal Checking, Savings and Securities Accounts – These funds are withdrawn directly from personal liquid assets.
2. Loans from family members or friends - These funds usually can be acquired with little or no interest at all!
3. Sale of an Asset - Quite simply sell something: real estate, a car, a boat, an antique, a collection, etc.
4. Loans against a Checking or Savings Account – This will often be in the form of overdraft protection or a credit card.
5. Loans against Securities or Retirement Accounts (IRA, 401K, etc.) - Terms on these loans vary greatly. Individual brokers and account representatives can provide detailed information on these loans.
6. Loans against Life Insurance Policies – Life insurance companies customer service departments have detailed information on this option.
7. Credit Card Cash Advances – Credit card companies customer service departments will provide details on this option.
8. Personal Lines of Credit – These are typically available at local banks and finance companies.
9. Home Equity loans – Take equity out of a residential property. Interest on these loans is often tax deductible. Local mortgage companies and banks have detailed information on these loans.
10. Refinance Real Estate taking Cash-Out – Interest on these loans is often tax deductible. Local mortgage companies and banks have detailed information on these loans.
11. Finance an Asset – Take cash out of an asset by financing it (boat, car, collection, antique, etc.). Contact a local bank or finance company for detailed information.
12. Seller Financing – This is often available by just asking the seller for terms.
13. Commercial Loan – Available at a bank or finance company. These loans usually require a personal guarantee, collateral and a well-prepared business plan.
14. Economic Development Programs – Check with state and local governments for details. This can be a very creative, beneficial and low cost source of capital.
15. SBA Loan (Small Business Administration) – The SBA offers a wide variety of programs, including loans from $5,000 to $2,000,000.
16. Venture Capital – This source of capital will look closely at the business as well as the buyer. Venture capitalists will expect a percentage of ownership in the new business in return for providing the necessary capital. Look for venture capital in local market areas,
17. Angels – These wealthy individuals enjoy investing in small businesses. Angels will require a sound business plan and a speedy, healthy return. Look for angel investors in local market areas.
18. Factors – These are businesses that buy receivables. When buying a business with outstanding receivables from reliable payers, a factor would consider pre-paying those receivables in exchange for 100% of the receivable when they are paid. Look for factors in local market areas.
19. Floor Planning – These are asset-based loans that allow companies to finance their inventories. The inventory is purchased as collateral until it is sold. Consider this alternative if the business being purchased has significant inventory. Floor planner can be found in local market areas.
20. Small Company Offering Registration (SCOR) – This is a simplified means of selling common stock to the public over the counter rather than having to follow more stringent IPO restrictions. SCOR’s must follow SEC regulations. Contact the SEC for more specific guidelines on SCOR’s.