How to Raise Business Start-up Capital

Updated on March 16, 2018
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George is an independent small business consultant and business owner with a mission to help entrepreneurs improve their management skills.

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Capitalize on a Solid Credit Rating

Having their own business is something many millions of people can only dream about. On a worldwide basis, there are approximately 200 million small businesses. So, many individuals realize their dream, but many others, for one reason or another, never get off the ground. One of the factors that discourages people from getting that business launched is a lack of start-up capital, and another may be the fear of losing their hard-earned investment.

Entrepreneurs are risk-takers. They often go out on the limb and risk everything they possess to try and turn their dreams into a successful business. However, statistics show that two out of five businesses fail in the first two years. Business failure impacts personal credit, as many use their personal credit cards to partially finance their working capital. Bankruptcies create a negative stigma that can cut off access to credit for periods of seven to ten years. The reform of the bankruptcy law in The USA dating back to 2005 has made the situation much costlier for entrepreneurs. It instills a fear-factor that often sidelines the risk-takers for the rest of their lives.

Many entrepreneurs go through several cycles of business start-ups before they are successful. Harsh bankruptcy laws discourage the start-up of new businesses, and this has a huge impact on the economy. The situation in Europe is even worse, with no protection for business owners from unpaid liabilities of the corporation. Laws and regulations strongly favor the banks and other institutional lenders. The world needs more entrepreneurs who are willing to put their ideas to work and create new jobs and are unafraid to take risks, again and again. Fortunately, the Internet has created new opportunities to put them back on their feet and finance their business models. Credit ratings need to be better understood and patiently improved over time.

With a bit of forethought, planning, and effort, it may be possible not only to raise enough start-up capital but do so using business credit. In this scenario, you leverage the business assets to borrow the necessary funds. Even when the business has not been launched yet, you may be able to obtain some form of business credit to get your business plan moving forward.

Building business credit is completely different from building personal credit, and it is best to keep them separate, if possible. Some credit reporting agencies can provide a business FICO score (700 is considered good, and 800 is excellent) based on both the risk of the business and the personal credit of the owner. In some instances, the owner's personal credit is linked to the business credit. You should also bear in mind that you do not have the same credit protection with business credit as you do with personal credit. There may be no maximum liability limit, which is normally set at very low levels for personal credit.

The process of building a good business credit record follows a certain path. There are four key elements that must be meticulously pursued to gain trust from lending agencies:

Business Plan

When you seek business credit, it requires that you project yourself as a business in every way. A business requires proper planning, organizational structure, command of financial controls, sales, and marketing strategy, and production efficiency. All this is included in a proper business plan. In preparing a viable plan, you transition from the role of an employee to being a business person. The first task is to convince lenders that you have a potentially profitable business. The quality of your business plan is essential. If you are seeking business credit without a proper map that others can readily follow, you will be turned down.

It all starts with setting up a legal business structure. Research and acquire all the needed licenses for the business from the different levels of government. Prepare a business plan, with the aid of an adviser or mentor. This demonstrates to potential lenders that you have clearly thought about all the factors involved in managing a business: the products/services, the markets, the competition, pricing, human resources, the sales strategy, and financial controls. Be prepared to defend your projections for sales, and your estimate of start-up and operational costs. This is usually accomplished through a three-year projection, which provides a detailed profit and loss statement and balance sheet. You will require the assistance of a reliable accountant to do this properly. A realistic plan is indispensable, whether you succeed in obtaining credit or not. It provides a map by which you can chart your course. Without this map, no lending institution will give serious consideration to your credit needs.

The initial business plan becomes a model for regular planning and strategy. It should be reviewed and updated on a quarterly basis, particularly when starting out. The realities of operating a business will sharpen planning skills and make subsequent plans more accurate. Plans should be broken down into weekly, monthly, and annual time frames with a specific action plan.

Another important preparatory initiative is to create a positive business credit profile. This will eventually help you to build up business credit without using your personal assets as collateral. The benefits of having a business credit profile are many. Most importantly, you will have access to more cash flow for the business in the form of a line of credit from a bank, vendor credit, separation of your personal assets, reduction of personal liability from the business, and the ability to grow your business.

Establish a Good Credit Reputation

Every business needs to buy some equipment, services, supplies, and materials. You can immediately benefit from any vendors who will grant you credit. It may be quite restricted at first, but if you maintain a good repayment record, the limits will be progressively increased. It is advantageous for your suppliers to report your credit history to the major business credit reporting agencies. Dunn and Bradstreet is probably the best known internationally. Unlike personal credit ratings, business credit ratings include revenues, cost of sales and profits. The top scores are reserved for the well- established and stable businesses, but as your business grows in revenues and profits and establishes a solid record of on-time payments, it too can achieve a good credit rating.

Credit Verification

In order to obtain business credit, it is best to undergo a credit verification by an approved agency. This will determine your compliance with the lenders' and credit agencies' requirements. Once you have done that, look for suppliers that are willing to issue credit without the need for intensive credit checks or personal guarantees. Remember that most suppliers will take a chance with a new business on a limited basis because they are always seeking new customers. If you respect their credit terms, you can count on extensions of credit limits over time. You can also utilize their references to improve your credit profile with the reporting agencies.

Grants and Subsidies

There are non-profit organizations and government departments that provide grants and subsidies for start-ups in their jurisdictions. This is particularly true if you can provide new employment in the region. It can be a huge boost for a young business and should form part of any start-up strategy. Check with your local or national governments by researching their websites. Seek volunteer mentors, who may turn into angel investors willing to contribute hard cash to your start-up needs. Don't hesitate to take advantage of such help. Fostering by business-savvy entrepreneurs will improve your knowledge and management skills, and make it more likely that you will succeed.

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