Raising Capital for Your Small Business

By Paul Lawrence

The 28-year-old man was in a difficult financial predicament. He had an idea for a business ... but he had no money in the bank, no job, and a general track record of failure.

The odds of getting the tens of thousands of dollars in capital that he needed would've seemed "slim to none." Yet within 10 days of his formulating his concept for the business, an investor had put in the money. And he was earning a healthy profit in less than 30 days.
As you might've guessed, the man I'm talking about was me.
Armed with a new plan to reverse my dismal position in life, I decided to start a snack-vending business. Not surprisingly, people weren't banging down my door to give me a loan.

Fact is, if you have a great business idea but don't have your own capital ... or excellent credit ... or collateral to secure a bank loan ... your choices are limited.

Yes, some venture capital firms will invest in new businesses, but such businesses are usually involved in technology or some other high-growth area. Frankly, for most small businesses, venture capital isn't even an option. It's rare for a small-business concept to have the kind of mammoth payoff venture capitalists look for.

Plus, the cost of doing business with these companies is high. It's basic economics. Their risk is high, so their reward must also be high. Even if you were to interest a venture capital company in your business, you'd be aghast at what they'd want in terms of their ownership position.
So if you forget about commercial bank loans and venture capitalists, you're left with only a few ways to fund your small business. One of the best is to find a business partner.

Now, when I say "find a business partner," I'm not talking about pleading with your parents to get a second mortgage on their home or twisting the arm of a lifelong friend who always said he'd do "anything" for you. (Although, if you do have affluent family members or friends who might want to invest in your business, you should certainly pursue that possibility.) I'm talking about hooking up with someone who is willing and able to invest in your business in return for a share of the profits.

Seeking a small-business partner is not much different than seeking a small-business loan.

"To be successful in obtaining a loan," the U.S. Small Business Administration tells us, "you must be prepared and organized when making your request. You must know exactly how much money you need, why you need it, and how you will pay it back. You must be able to convince your lender that you are a good credit risk. All the same holds true in seeking out a small-business partner to invest in your business."

As most everyone knows, small businesses have an abysmal failure rate. According to Business Week Online, "64.2 percent of businesses fail in a 10-year period." No wonder potential investors tend to be so skeptical of a new business's chances for success!

When I wanted to enter the snack-vending business, I needed capital to purchase the machines. To overcome the understandable reluctance an investor/partner might have, I used some strategies that I have since developed into a technique I call "SIPE" - which stands for Solicit, Interest, Persuade, and Execute.

With the SIPE strategies, I quickly and easily found a former co-worker who was eager to be my partner.

Here's how you can use SIPE to find and solidify your partnership:

1. Solicit: Present the hypothetical possibility of a future business opportunity. Casually ask your prospective partner, "If I happened to come across an interesting business opportunity, would you be interested in hearing about it?" It's important to note that you're not asking her if she would invest in a business, but if she'd like to hear about potential opportunities. Since she won't feel that she's being pressured, it's more likely that she will give you a positive response.

You also immediately rule out people who have no interest in any business proposals ... without putting them (or you) in an uncomfortable position regarding your project. In my case, I mentioned to my former co-worker that I was planning to start a small business, and asked if he wanted to be kept in the loop during the process. He readily agreed.

2. Interest: Give your prospective partner a one-sentence description of your business.

A long-winded explanation can sound like you don't have confidence in your business idea or that you don't really know what you're talking about. So keep it short and to the point.
You then follow up with a couple of supporting statements that provide strong reasons to believe your business idea is viable. In the case of my vending-machine business, I used the example of a friend of mine who, with no experience in the business, was able to start a profitable 10-machine route.

3. Persuade: Use statistics and estimates to convince your prospective partner that your business is a good investment.

Your persuasion efforts will have two goals: First, to prove the substantial profit potential.

While you don't necessarily need a fully detailed business plan, you should be able to offer some basic numbers. For example, you could estimate your gross revenues for the first year and provide some reasonable basis for the estimate. Then offer a reasonable estimate of your expenses. If it adds up to a healthy estimated net profit, you're off to a good start.

Second, to demonstrate the low-risk factor.

Although you can't ethically or legally guarantee that an investor won't lose her money, you can explain why there is a good chance she won't lose it. Your evidence could include industry growth statistics, a sound marketing plan that will allow you to swiftly capture market share, and examples of similar successful businesses.

In my case, I created a profit projection sheet that broke down the revenues and the costs of the business. I then cited specific suppliers who sold the products we'd need and provided several examples of local entrepreneurs who were successful in the snack-vending business.

4. Execute: Turn a discussion into an actual business deal.

Once my co-worker indicated that he was interested in investing in my business, I suggested we have another meeting to formulate a deal. I arrived at that meeting prepared with a "deal memo" - a basic outline of our understanding. The main reason to have a deal memo is so that, in the future, there will be no debate as to what was originally agreed to. If your deal is large or complicated, you may want to have a formal partnership contract. But in many cases, a deal memo clarifies the terms of the agreement and is strong enough to be legally enforceable.

In my 15 years of being successfully self-employed, the great majority of my partners have profited from our ventures. There are certainly risks involved in investing in any small business. But if you have a solid business opportunity to offer, you'll likely be able to structure a "win-win" situation for both you and your partner.

Published by Himarticles