By Fritz Villafuerte, RFP (originally published in our MoneySense Q3 2015 Issue)
How do you raise the start-up capital for your business?
The question is probably the biggest problem faced by those who want to become an entrepreneur.
Personally, I’ve heard friends say that if only they had enough capital, they would really quit their jobs and put up their own businesses. Admittedly, I was also burdened by this obstacle years ago when I was still working as an employee.
Through the years and several businesses later, I’ve discovered that there are actually many ways to do this. Some are easy and some are not. Some are quite obvious while some takes a little creativity and a bit of due diligence to make it work.
So if you’ve always wished that you had enough funds to start your own business venture, then I hope that these ten ways can help you raise the capital you need to become an entrepreneur.
1. Your Own Savings
The most obvious way to get your startup capital is to save money. Be frugal, live below your means, and pay yourself first. The advantage of this method is that if your business fails, then you owe nothing to anybody and you have no financial burdens to worry about.
However, although this may seem ideal to some, it could take a long time before you finally have enough money saved to start. Recommended for those who are not in a hurry to start a business, and those with very low risk tolerance.
2. Liquidate Assets
Aside from digging into your savings account, you can also sell some of your assets like what my father’s friend did who sold their old family car to put up a small photocopying center.
Depending on the amount of capital you need, you could simply look around the house, and sell whatever you have such as gadgets, jewelries, and even some of your furniture or appliances.
If you have portfolio investments, you can ask your broker if you can liquidate some of your paper assets or withdraw from your mutual fund or time deposit accounts.
3. Work for Extra Income
We often look for ways to earn extra income only when we are in financial need. What many people don’t realize is that, finding a second job or working on a sideline is a great way to raise capital for your dream business.
Assuming that your current employment can cover all your financial requirements, then the profits from your extra ventures can all go straight to your start-up fund.Going this route can be time consuming and exhausting but it’s relatively faster than just doing the two previous methods.
4. Take Out A Personal Loan
A personal loan is something you can leverage on, especially if you are employed. Depending on your credit history and employment status, some banks and almost all credit card companies are willing to offer these types of loan without much hassle, and without collateral.
Additionally, these salary loans are available in the Philippines through the Government Service Insurance System (GSIS) and Social Security System (SSS). Meanwhile, microfinance institutions can also provide non-collateral personal loans to those who can present to them a sound business plan. You can inquire from Philippine government agencies such as the Department of Trade and Industry (DTI), Small Business Corp (SBC) and the National Anti-Poverty Commission (NAPC) about these micro-financiers.
5. Apply For a Bank Loan
Bank loans are also a viable option to raise capital for your business. Although the interests are much higher than personal loans, the financial strength of banking institutions allows them to provide you with a larger loan amount for your medium scale business ventures. Be ready to give them a good business plan and a collateral for the loan.
Ask your bank if they offer business loans. A brief research shows that some of the SME-friendly banks in the Philippines are Planters Development Bank, Bank of the Philippine Islands (BPI), Development Bank of the Philippines (DBP) and Land Bank of the Philippines.
6. Use Credit Cards
Credit cards can easily be used to gain some business capital. Avail a cash advance or make the necessary purchases for your startup venture. If you always pay your credit card bills in full every month, your credit limit could go as high as P250,000 in a couple of years – which is usually high enough to leverage on and start a business with.
A few reminders if you plan to do this method. First is to remember your cut-off date and do your purchases right after so you’ll have more time to save up. Second is to remember your due date. When you become so busy and engaged with your business, you might forget to pay your bills.
And lastly, since you’ll be paying around 3.5% interest per month on your credit balance, it’s essential that your business generates enough income to cover for the payments and these charges. Again, having a thorough business plan plays an important role in this situation.
7. Check Rediscounting
Lenders that offer check rediscounting are not difficult to find. This method requires you to issue post-dated checks in exchange for its amount in cash less the interest. For example, at 5% interest, you’ll receive P19,000 if you issue a check worth P20,000. Rates and length of payment dates vary for different lenders.
Although less advantageous than using credit cards, it is still a good option for short-term business cashflow needs and small business capital requirements. Again, make sure that you’ll be able to generate enough money to clear the check on time.
It’s also good practice to have backup plans just in case you don’t earn enough money to cover the check amount. You can prepare frozen assets for selling or ask friends if they could help just in case this scenario happens.
8. Borrow Money from Family and Friends
Another good option to raise capital for your business is to borrow money from family and friends. One great advantage of doing this is that most of them are usually willing to lend you money without or very little interest. You can also enjoy more flexibility on your payment terms.
Remember though that if you go for this method, you are putting your reputation on the line. So do your best to pay on time and if your business earned more income than expected, give back a little extra as gratitude for their trust.
When talking to them, be straightforward and honest with your intentions. Do it professionally and present to them a business plan. Furthermore, produce a contract stating the agreed terms between you and your friend.
Lastly, be clear that you’re merely borrowing money from them and they will not legally own part of the business. Some people might think that just because they lent you money for the startup, they instantly become investors and can actively participate in the business. Occasional help and a few suggestions can be entertained but draw the line and state that executive decisions will solely come from you.
9. Form a Joint Venture
Instead of borrowing money from family and friends, you can also consider making them a real part of the business. It’s very common nowadays for friends to pool their money and resources to put up a business. There are actually ventures that succeed faster through partnerships. Make a team whose strengths and expertise complement each other. For example, one partner can have good accounting skills, while another is proficient in sales and marketing, and one is a legal expert.
Unfortunately, many friendships have also been strained when things go wrong or become difficult. It’s important that from the very start, each one understands the amount of work that needs to be done and is willing to go the extra mile to make the business successful. Also, be sure to clearly define the responsibilities, boundaries, and jurisdiction of each partner in the business. Lastly, write everything on paper including the options and terms if ever one partner chooses to leave the business.
10. Seek a Venture Capitalist
Venture capitalists are also called angel investors. These are people or companies who are willing to pay for your startup in exchange for part ownership or royalty fees from your business.
One major advantage of doing this is that you could further tap the VC’s extensive network of partners to help enhance your business. However, do remember that most likely, you’ll lose free rein over running your business because certain decisions will need to be consulted to the VC before they can be implemented.
Looking for a venture capitalist can be quite difficult in the Philippines but they do exist. Always have an elevator pitch ready just in case you bump into one. You can also seek them out in online forums and websites such as the Brain Gain Network (BGN), where Filipino VCs and technopreneurs are some of the active members.
That’s it! I hope I was able to help and give you an idea on how you can raise capital for your business.
Lastly, remember that whichever way you choose among these ten, having a good business plan is always an essential tool. It will help you ensure that your business will be able to pay your creditors on time and more importantly, convince investors to join your venture.