Business

How to Raise Capital for Your Small Business the Smart Way by @deborahsweeney

by Deborah Sweeney | Featured Contributor

Money is the lifeblood of business. It doesn’t matter how passionate you are or how good your idea is, if you don’t have any money, your business is dead in the water. Now, I understand that talking candidly about money can be considered a bit taboo. Income and budgets are seen as intimidate details of our personal lives, shared only with the people we love and trust, along with our accountants. The transition from working stiff to entrepreneur, however, requires that you shed the shackles of taboo and candidly approach the questions of capital. How are you going to raise money to get your business off the ground?

Have a Plan Before you approach anyone, you should do some research and create both a business and a marketing plan. What demographic are you aiming for? Is there anyone else running a similar business your area? What sets you apart? How do you plan to grow? These are the sorts of questions you need to have immediate answers for if you expect anyone to trust you with their money. You’d be surprised how many people go to their bank ill-prepared and leave surprised that the bank didn’t want to lend money to someone with nothing but a vague idea for their business.

Be Realistic Unless you have the most mind-blowing, amazing idea ever, chances are good that bankers and investors are not going to be lining up to shower you with wealth. Small business investments are seen as a bit risky, especially if the loan-seeking business hasn’t been around for very long. When you approach possible investors, do so with realistic expectations. Don’t just go up to them and say you expect complete local market coverage within a few months – they’ll a) know you’re lying, and b) think you’re a complete airhead. There is a big difference between being confident and being pointlessly brazen. By all means, talk up your idea, but have the data, and a plan to back that idea up.

Consider Both Debt and Equity Debt is what you get in when you take out a loan, while equity is the money you receive for selling off part of your company. Debt you have to pay back, money raised through equity you don’t. But, if you want to raise money through equity, you typically have to incorporate your business and set a number of shares that the business is authorized to sell. That means you are beholden to the whims and wants of the shareholders, as it is their money you are playing with and they own part of the company. Of course, it doesn’t have to be either/or. You can run a business with a loan and equity, and many small businesses do just that.

Get EVERYTHING in Writing And I mean everything. Are you borrowing money from your cousin? Make sure you both write down and sign the conditions of that loan. Are you and a business partner starting an LLC with your collective savings? You’ll need a document outlining who owns what, and an operating agreement to define roles and set up how the company will be run. I know this may sound paranoid to some of you, but when it comes to money your best friend can very quickly become your worst enemy. If that happens, you’ll be thankful for your earlier preparation in keeping friendship and finances fairly separate from each other.

Read the Fine Print So someone offered you some cash? Awesome! Just remember that there is no such thing as a free lunch. Banks, friends, angel investors, venture capital firms – they all want something for their investment, and before you sign the first bit of paper put under your nose, you need to know the terms of the contract. Are your investors going to expect a seat on the board? What are the terms and rates for your small business loan? I know we always tell ourselves we’ll read the fine print when it really matters, but sometimes it’s so exciting that somebody actually wants to offer you a loan or invest that we just put off paying attention to the fine print. I’ve seen plenty of small business owners get in over their heads because they were contractually obligated to hit goals they couldn’t possibly reach. Don’t be afraid to negotiate and, if the terms of the agreement make you uncomfortable, politely decline the offer. Money can wind up being the cause, and solution to, most of your company’s problems.

Before you take out loans or look for investors, make sure that you’re okay bringing in someone from the outside. Sometimes bootstrapping is the best answer. But if you need outside capital, look for it smartly. Have a plan, know the terms of any loans or investments, and consider forming a separate business entity, like a corporation or limited liability company, to help protect your personal assets from the business’s debts.

This all may seem like a lot of work, but there is a good reason why money is a touchy subject in our society, and the last thing you want is to get run out of business due to a ludicrously expensive loan or a shady investor.

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Deborah Sweeney – Legal Expert, CEO, MyCorporation.com – Calabasas, CA

Deborah Sweeney HeadshotAs CEO of MyCorporation Business Services, Inc. (MyCorporation.com), Deborah Sweeney is an advocate for protecting personal and business assets for business owners and entrepreneurs. With her experience in the fields of corporate and intellectual property law, Deborah has evolved from lawyer to business owner. She has extensive experience in the start-up and entrepreneurial industry as she has been involved in the formation of hundreds of thousands of businesses for MyCorporation.com’s customers. Ms. Sweeney received her JD & MBA degrees from Pepperdine University. She is active in the community and loves working with students and aspiring entrepreneurs. She serves on the Board of Regents at California Lutheran University and is a founding member of Partners of Pepperdine. Deborah has served as an adjunct professor at the University of West Los Angeles and San Fernando School of Law in the areas of corporate and intellectual property law. Ms. Sweeney is also well-recognized for her written work online as a contributing writer with top business and entrepreneurial blogging sites.  She is a regular contributor on Forbes, American Express, Social Media Today, and BlogHer among many others. In her ‘free’ time, Deborah enjoys spending time with her husband and two sons, Benjamin (8) and Christopher (6). Deborah believes in the importance of family and credits the entrepreneurial business model for giving her the flexibility to enjoy both a career and motherhood. Follow her on Twitter @mycorporation.

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