How to Raise Capital for Your New Business (While Keeping it Simple)

moneyWhat is the number one reason budding entrepreneurs are prevented from opening a new business?

It’s not lack of skill, or lack of willpower, or even laziness.

It’s money.

It can take a lot of money to start a new business.

Even though technology has steadily driven down the cost of starting a business, there are still dozens of costs involved in launching any new business.

When you start a new business, you need money for buying inventory, hiring staff, purchasing furniture or equipment, leasing space, and you need to set aside income for yourself and your employees as your business ramps up.

A lot of my clients say that the biggest challenge for going to work for themselves was finding a source of the money to get started.

So how can you get money to start a business?

Here are some very simple ways to raise money for a new business.

There are many more sophisticated ways of raising money for a new business, such as from venture capitalists, U.S. Small Business Administration lending programs, banks, etc., but we’re not going to focus on those areas in this article.

The goal here is to suggest a couple of very simple ways you can gain access to money, quickly, without a lot of hassle and paperwork.

1.  Create a Business Plan

The first thing you can and should do is to create a business plan, if you don’t have one already. Although a business plan in and of itself won’t raise you money, it’s crucial if you want to be taken seriously.  Not only is a business plan important for attracting investors, but it will also increase your chances of success in the long run.

Creating a business plan doesn’t have to be an unbearable task.  As you sit down to write your business plan, start by finding a template that clearly lays out the categories you should write about.

It’s easy to find templates online. You could create a business plan in 15 minutes, although it’s better to set aside a couple of hours to truly think through your market, products, and goals.

After you’ve written your business plan, show it to others and ask them for their honest opinion of your ideas. If you get a couple of people giving you negative feedback on the concept or the carry-through, perhaps you should rethink your business idea.

2.  Raise Money By Lowering Your Costs

Another simple way of “raising” money for a new business is by lowering the cost of opening a new business.

For each cost, ask yourself: do you really need it? Do you need expensive office space in the heart of downtown, or could you work from home? Do you really need to have employees? Do you really need top of the line office equipment or will used items do the job, at least initially?

There are many different types of businesses which can get started with very little up front costs, such as consulting, coaching, brokering, and other types of services-based businesses.

Even if your new business will require substantial capital to get going, there are a million different ways you can lower costs, such as by getting internet-based phone system like Skype or even lowering the thermostat from 72 to 68 degrees during the winter.

3.  Dig Into Your Own Pockets

Before you look for money sources elsewhere, you should look within. Do you have any savings you can tap into?

It’s far easier to come up with your own money than to get money elsewhere.  Of course, just because you have money doesn’t mean you want to risk it.  If you do have money but you’ve made a rational decision that you don’t want to risk your own money on this endeavor, that’s another matter.

Many entrepreneurs have gotten started by borrowing against credit cards, although I wouldn’t recommend it. Cash advances on credit cards are extremely expensive and require a lot of money to service the debt on a monthly basis.

4.  Borrow From Family Members

If you have parents with money they are willing to lend to you to get off the ground, or a wealthy aunt, uncle, or grandparent, then what are you waiting for? Now is the time to tap into that resource!

Your family members love you (or they should anyways), and they are the most likely to lend to you, on the basis of their relationship and trust in you.

Be aware however that borrowing from family members is fraught with problems. I’ve often said if it weren’t for family members and friends going into business together, then lawyers wouldn’t have anything to do.

It’s very easy to have two family members go into a loan agreement with very different understandings of the terms, because they never discuss and agree to the specifics of the loan, nor do they get an agreement in writing.

If you do borrow money from a family member, document your agreement in writing to ensure you both have the same understanding regarding the terms of the loan.

5. Trade or supplier credit

Some product manufacturers or inventory suppliers will provide credit to a new business in order to try to encourage them to become a long-term customer.

As a new business, you can use this to your advantage. Find out what suppliers will extend credit.

You will need to make timely payments as agreed to build a good relationship with the supplier.

6. Life insurance policies

Most life insurance policies (not including term insurance) will allow the owner to borrow against the cash value of the policy. The money can be used for any business or personal need.

I don’t advise clients to borrow against their life insurance policies, as it detracts from the point of having a life insurance policy in the first place.  However, it can be a temporary solution.

7.  Borrow From 401(k) Plans

Here’s another source of funds I normally wouldn’t recommend pursuing; however, I include it because it should be your decision.

Most 401(k) plans allow you to borrow against them.

One of the advantages of borrowing against your 401(k) is that there’s very little paperwork to fill out and most loans are issued without you having to detail why you are asking for the loan.

Imagine asking the bank for a loan and not disclosing why you’re borrowing the money. Yeah, that’s not going to happen.

8.Get Paid First

Some of the most profitable businesses are in industries where a business gets paid first, and delivers product or services later.

Why do you think Warren Buffet made billions off of investing in the insurance industry? He saw the unique advantage of the insurance business – insurance carriers collect money up front, and then pay out claims as needed.

As a result, many insurance companies are sitting on vast cash reserves, which they then can invest and profit from.

Insurance is a little abstract and complex for small businesses, but think about how you can manage to get paid first. For example, see if you can create a product or service only after receiving the first payment or making your first sale.

In Erin Blaskie’s Passive Revenue Powerhouse, which I recently reviewed, Erin explains how she gets paid to create products like e-books and online courses.

She puts up a presale page for an ebook or course she is planning on creating. She allows people to pre-order the product, saying that it will become available in four weeks’ time.

By setting up a pre-order page, she has at least one sale already before she has even created the product. It also allows her to “test” the market to determine if there is enough demand to justify spending the time to create the product.

Don’t Let Lack of Funds Stop You!

Finally, even if none of these sources of funds work, you shouldn’t let that stop you. If you are determined enough, you can launch a million or a billion-dollar business on a shoestring.

Although these methods of raising money may work for some people, they are unlikely to work for everybody, so if you are finding no luck then perhaps you need to seek out more conventional sources of funds.

Do you have any ideas for simple ways to raise capital for a new business?  Please leave any suggestions in the comments below!

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Photo credit: Flickr/doctorwonder