Blog | Entrepreneurship

Raising Capital: The Entrepreneur’s Ultimate Guide

If you’ve done your homework, you know that being able to invest is not about how much cash you have.

Summary

• Being a successful investor doesn’t require having cash on hand

• There are many ways to raise capital

• There are four main factors to building confidence in your investors

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Let’s say you have an opportunity to purchase an old, but classic, 10-room boutique hotel that is about to go into foreclosure. But there’s something missing. Is it the cash?

Or maybe you have a small business you want to start or an existing business you want to grow; yet you need an injection of money to take you to that next level. You call a few people as potential investors, but how do you persuade them to invest in you and your business?

Back in the day, you’d build a great relationship with our local banker; and when you needed a loan, you could get a meeting, sit down, and plead your case. Down the road, you may grow to know each other, and even operate in good faith on some occasions.

Today, you’d be hard pressed to find a banking relationship like that.

So, if you’re looking to get into investing or want to start your own business, the prospect of getting capital can seem a bit overwhelming if you’re only focused on institution-based financing. But don’t let that deter you from your goal, as there’s never been a better time to pursue entrepreneurship — especially if you have the key to success in business: an entrepreneurial spirit.

One of the keys to success as an entrepreneur is your ability to raise capital. And it's often said that the key to raising capital is a person's ability to sell.

The question is, "What are you selling?"

The four factors to raising capital

Raising capital, also known as OPM—Other People’s Money, is a must-do in the world of investing. It’s also one of the most intimidating parts of starting out as an investor.

So it always helps to have a little guidance along the way. There are four key factors to know and address before you go out asking for capital. If you can clearly and confidently address each of these four issues, then the odds of securing funding are in your favor.

1. Project
2. Partners
3. Financing
4. Management

Address these four points clearly and confidently and your investors are likely to buy in. If you can show a prospective lender or investor that you have command over these four pieces of the puzzle, then selling will not be an issue, and you will attract more money than you thought possible.

Let's take a closer look at these four factors, and some of the questions investors and lenders will be asking.

Project

Investors and lenders need to easily understand what you’re asking them to give money for. Keep it simple. Keep it concise. Keep it real.

• What is the project that the lender or investor is providing you capital for?

• If it's your business, then what exactly is your business?

• What makes your business different from others in your industry?

• What will make it successful?

Explain both the positive and negative aspects of the investment. Why is it unique and what are the advantages of your investment for the investor?

Partners

Put yourself in the investor's shoes for some perspective. Whose music project would you be more likely to invest in—Paul McCartney's or Mike Tyson's? Whose new skincare company would you back—Mary Kay's or Lindsay Lohan's? It's not rocket science. It's common business sense. The experience that the partners bring to the table, and how comfortable the investor is with their level of expertise, are what will drive any investor's decision.

Questions that need to be answered:

• Who are the key partners behind the project?

• Who is putting the deal together?

• What experience do the partners have?

• What is their track record?

By answering the above, you make the investor(s) feel comfortable and confident working with your team.

Financing

Show the real numbers. This is obviously a bit trickier for a startup company because most of the revenue numbers will be projected numbers, not actual numbers. This is where previous experience can help to overcome that obstacle. Show the investor, as accurately as you can, how the project, be it a business or an investment, will make money. Be realistic. Investors don’t want to see the best-case scenario, they want to see the most realistic numbers, including the problems and roadblocks ahead. Every business and investment project has problems. Pretending that yours won't makes you look like an amateur.

• How much money are you raising in total?

• Where is the money coming from?

• Is the money being raised from private parties, traditional lenders, pension funds, or government programs?

• What are the terms?

• How are you going to use the money being raised?

• What are the funds being allocated to? One hint: If it's ever suggested that some of the money raised is to pay you, as the owner of the business, or the deal, consider the door closed. If you want a paycheck, get a job.

And, of course, you must answer these two key questions for your potential investor: How soon until I get my initial investment back? What is the return on my money?

Remember, investors want to know the truth and avoid surprises whenever possible.

Management

It's said, "Money follows management." However, your case is so much stronger when you address all four components, not just management.

Investors want to know who's running the day-to-day operations. This is key to the ongoing success of any venture.

What makes them vital to the success of this project or business?

• What is the experience level of the management team?

• Who are they?

• What are their backgrounds and expertise?

If you are starting your own business or if you're raising money to grow your existing business, then the partners and the management team may be the same people. That's not a problem at all, as long as the investor has confidence in the experience and expertise of the team.

Raising capital for business

Today, the alternative marketplace-based lending systems (also known as peer-to-peer lending) are a powerhouse industry —and it’s a solution that can fit anyone’s needs. This means that the banking system isn’t the only way to get funding.

Now that you’re clear on what investors want to hear,are you ready to find out how to raise capital? Let’s explore six market leaders that you should be aware of and are worth your consideration if you’re looking for an injection of capital for your next entrepreneurial endeavor.

Here’s how it works:

Amount Square deposits in your bank account: $10,000

So it’s an automatic repayment model, where your loan is repaid using a percentage of your Square daily card sales. The amount you owe never changes, regardless of how long it takes to pay Square. No late fees, ongoing interest or surprises. To date, they’ve extended over $9 billion in funds to more than 460,000 merchants. The end result? A whopping 95% of those merchants say their businesses grew as a result. If you still need more incentive about this lending system, applying for this loan won’t even affect your credit score.

1. Square Capital

   Square is known for its suite of POS (point of sale) tools for business owners. If you’re a Square merchant, you can qualify for a quick loan of cash that is as easy as pressing a button in the app.

   As they explain: To understand how Square Capital works, here’s an example. Let’s say you accept an offer for $10,000, the breakdown might be as follows:

   • Total future payment card receivables due to Square: $11,000

   • Percentage of daily card sales that go towards receivables payment: 10%

2. Kabbage

   Kabbage works like a line of credit. By setting up an account on Kabbage, you can qualify for a line of credit in minutes up to $250,000. You can then draw on that line of credit as needed for various investments. You pay only for what you utilize, and the fee system is pretty straightforward:

   • Six-month, 12-month and 18-month terms are available. The six-month terms require a $500 minimum loan.

   • Fee rates are 1.25% - 10% of your selected loan amount, which is based on a number of business performance factors.

   • Every month, you pay back an equal portion of the loan principal, plus the monthly fee.

   • No prepayment penalties, which means you can pay your loan off early and save on those monthly fees.

   • Each draw is treated as an agreement between you and Kabbage. Draw against your line as often as once a day. Pay only for what you take; there’s no obligation to take the funds if you qualify.

3. OnDeck

   OnDeck says its 100 percent committed to small business lending. And they put their money where their mouth is, having delivered over $15 billion in loans to small businesses while maintaining an A+ Rating with the Better Business Bureau.

   The company works like traditional banks, offering both standard loans and lines of credit that you apply for online. The difference is that decisions are reached in about 10 minutes and the money is in your account within 24-hours when approved. Isn’t it amazing how quickly lending systems work?

   According to their website, they launched OnDeck in 2007 to solve a major issue facing small businesses: Financing. By combining passion for Main Street with cutting-edge technology, they evaluate businesses based on their actual performance, not personal credit. Because of this, they have significantly higher approval rates than if they only reviewed personal credit scores like other traditional lenders.

   As a result, entrepreneurs can focus on growing their business instead of seeking financing. Here's what you can expect:

   • The offer term loans from $5,000-$50,000 with rates as low as 11.89% APR. You’ll pay a set amount for a fixed amount of time. The term lengths are 3 to 36 months and, since they report payments to bureaus, your on-time payments will help build your business credit.

   • Alternatively, you can choose a line of credit and pay only what you borrow from this flexible plan — between $6,000 and $100,000. The term length is 12 months, and there’s no penalty fee for prepayment. Once you’ve repaid what you borrowed, you have access to your full credit limit again.

   • No personal or business collateral is necessary.

4. LendingClub

   LendingClub is a peer-to-peer lending system, allowing individuals to pool their money to invest in opportunities. So, you can both lend money or apply for a loan. More than $80 billion has been borrowed by over 4 million customers.

   Here’s how it works:

   • First you’ll apply and get customized loan options in minutes.

   • Next, you’ll choose a loan offer by selecting the rate, term and payment options that work best for you.

   • That’s it: Money will flow directly into your bank account.

   • Also, repayment terms are from 6 months to 5 years and there’s no early pay off fee.

     Wondering if you’re eligible? They are looking for 12 or more months in business, at least $50,000 in annual sales, no recent bankruptcies or tax liens, and you must own at least 20% of the business and have at least fair or better personal credit.

5. Funding Circle

   Funding Circle’s website claims it’s the “world’s leading platform for small business lending” and has lent over $20 billion since 2010, to over 135,000 businesses. It’s 100% focused on small businesses, helping them cover upfront costs, tackle emergencies, consolidate business debt and grow their businesses.

   • Through their platform you can both get both a small business loan or invest in small businesses.

   • You can borrow $25,000 to $500,000 over six months to five years, and decisions are made in as little as 24 hours with money arriving within a day.

   • The online application takes about six minutes to complete and you’ll hear from a loan specialist within an hour.

   • They have additional options for women-owned businesses and minority-owned businesses, too.

6. Kickstarter

   You’ve probably already heard of this one, but it’s still worth mentioning. Kickstarter is a crowdfunding platform that helps entrepreneurs and inventors launch products — its mission is to “help bring creative projects to life.” Unlike the others on this list, this platform caters more to those who have a great idea but need the money to get started from nothing.

   The nature of Kickstarter — having crowds of people fund your project with an all-or-nothing goal — means you have to be well-organized with a thought-out plan for your product and a good marketing angle. But for those who do it right, there’s a lot to be gained.

   Since Kickstarter’s launch in 2009, they’ve funded over 245,000 projects, with over $7 billion going towards creative work. Some of these projects have even gone on to win Grammys and Oscars.

No more excuses

As with anything, it’s important to do your homework and weigh the pros and cons. But the phrase “I don’t have the cash to invest,” is no longer a sufficient excuse. Now that you’ve been given the four main factors to raising capital, and multiple methods to do so, all you have to do is get started.

Keep your pitch to these four factors and help your investors feel confident that you can deliver what you say you can. Then, deliver on your promises and watch your cash flow grow!