Published January 14, 2008

Innovative Ways Companies Raise Money for New Business

Banks

The obvious choice is to approach banks for a term loan, wherein the bank will give you a certain amount of money as a loan and you will have to pay it back in monthly installments, along with any interest payable on that loan.

However, the documentation required is quite extensive - and most banks require your previous 3 year profit-and-loss statements, along with your balance sheet.

So if you have a startup business, then this automatically rules you out. You might also have to provide a guarantor and/or provide collateral against the loan. As a startup company, restrictive terms and conditions that the banks have will make you ineligible for any loan.

If this is the case, you should try contacting the SBA (i.e., Small Business Administration), which is an arm of the Government that could stand as a guarantor against your loan. Utilizing the resources of the SBA could enable you to get a loan at reasonable rates of interest.

Avoid the temptation to use your credit cards to get fast financing. The interest rate on credit cards is very high, and could bleed your startup business dry.

Venture Capitalists

These are individuals who will provide you with business financing if they see (financial) potential in your business. You will have to submit a detailed project report of your company to them along with a viable business plan, and they will decide whether to provide you with the necessary capital.

With Venture Capitalists, you will have to make them a part of your company - and in some cases, they might also have the power to take over your company if they feel that you are not managing the company efficiently, or if they think that they can do a better job.

They will not be interested in collateral, but only in your present state of your small business.

Factoring Companies

If you have enough financing to start your company, but are finding it hard to cater to customers because of credit sales, then factoring your invoices is a good way out. Factoring companies will buy your credit invoices, pay you the money minus their fees, and even collect the money from your customers.

This will improve your cash flow immediately and enable you to pay employees' salaries and your suppliers. Utilizing this method will also take care of payment collection from your customers and requires minimal documentation.

Parents, Friends and Relatives

This is an informal way of raising money. You can try convincing your parents, close friends or relatives to invest money in your business by either making them partners or classifying it as a loan for your startup business.

One advantage of such a loan is that you can be a little flexible in repaying this loan, and you also won't have to have any collateral (except maybe the relationship). However, failure to repay a loan like this can have serious social repercussions, in addition to legal problems.

Compared to the old days where you could only approach banks for money, today there are more creative ways of raising money for your small business, some of which are mentioned above.