smart capital

8/13/2019 Smart Capital

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Smart Capital

How to raise all the financeyour business will ever need

Des Vadgama

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Copyright And Legal Notices.

Copyright 2007. Des Vadgama Smart-capital.co.uk

LEGAL NOTICES:While all attempts have been made to provide effective,

reliable, verifiable information in this report, neither the author nor publisher assumesany responsibility for errors, inaccuracies, or omissions. If any advice concerning

financial, tax, legal, compliance, or related matters is needed, the services of a qualified

professional should be sought. This book is not a source of legal or regulatory

compliance, or accounting information, and it should not be regarded as such.

It is published and distributed with the understanding that the publisher is not engaged

in rendering legal, accounting, investment or otherwise professional service. If legal

advice or other expert assistance is required, the services of a competent professional

person should be sought.

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PREFACE:

If youve got a business or, simply the germ of a business idea andyoure looking for investment capital this report will lead you throughthe various financing options available to you.

And it will do so in plain talking English.

As you and I both know, every business needs cash flow in order tosurvive and thrive. This is true for multi-national corporations, Internetdot-coms, factory owners, private practices, shopkeepers, kitchen table

entrepreneurs and every type of business in-between.

No Cash Flow - No Business

But what if your business doesnt have the requisite cash available inits war chest to finance the business growth?

Does this mean you have to kick your business growth plans intotouch? Does this mean you have to dump your embryonic businessidea altogether?

Not at all. The aim of this report is to show you a variety of businessfinancing options. And its sure to open your eyes to a flurry of financingoptions youve probably never thought of before.

Granted not every financing option detailed in this report will beright for you or your particular business at this present moment in time.

On the following page is an outline of the financing options thatll bediscussed in this report.

By the way, its best to read this report in the order in which it ispresented. This way youll get a greater appreciation of the optionsavailable and itll spark ideas on how to fuse different optionstogether.

Any questions/comments just email: [email protected]

Web: www.Smart-Capital.co.uk Tel: 0800 781 2281

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mailto:[email protected]://www.smart-capital.co.uk/http://www.smart-capital.co.uk/mailto:[email protected]


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TABLE OF CONTENTS

1.0 The Different Types Of Capital.1.1 Debt Capital.1.2 Equity Capital.

2.0 Debt Capital Investment Or Equity Capital Investment?2.1 Exactly Why Does Your Company Require Extra Capital?2.2 What Is The Financial Condition Of Your Company?2.3 How Much Capital Does Your Company Require?2.4 What Stage Of Growth Is Your Company At?2.5 What Constraints Will The Financing Source Put On The Day-

To-Day Operation Of Your Company?

2.6 What Impact Will The Investment Capital Have On YourCompany?

3.0 Creative Methods Of Financing.3.1 Joint Venture Partners.3.2 Vendor Financing.3.3 Customers That Prepay.3.4 Trade And Barter.3.5 Franchising.3.6 Licensing.3.7 Asset Sales.3.8 Consignment (Sale Or Return).3.9 Advertising Remnant Space.3.10 Investor Advertising.3.11 Friends And Family.3.12 Home Equity Loan.3.13 Credit Card Financing.

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3.14 Royalty Financing.4.0 Angel Or Private Investors.

4.1 Angel / Private Investors.4.2 Angel Networks.4.3 Angel Online Matching Services.

5.0 Business Incubators.5.1 Non-Profit Business Incubators.5.2 Private Business Incubators.

6.0 Financing Programmes.6.1 Purchase Order Financing.6.2 Factoring And Accounts Receivable Financing.6.3 Lease Financing.

7.0 Finders And Intermediaries.7.1 Finders, Intermediaries, Finance Consultants, Investment

Brokers.

8.0 Grants.8.1 Business Grants The Basics.

9.0 Traditional Lending Sources.9.1 Conventional Loans.9.2 Revolving Credit Line.9.3 Letters Of Credit.9.4 Special And Development Fund Loans.

10.0 Venture Capital.10.1 Venture Capital Firms.10.2 Venture Capital Leasing.10.3 Venture Capital Online Services.

11.0 Conclusion

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1.0 The Different Types Of Capital:

Lets begin by distinguishing between the different types of capital.

In a nutshell, there are mainly two kinds of capital:

Debt And Equity.

Lets take a closer look at each:

1.1 Debt Capital: Debt is money borrowed (i.e., a loan) which mustbe repaid (with interest) over a set period of time.

Thus, the capital loaned generates money (through interest) for the

lender.

Typically, capital lent (that constitutes a debt) to the borrower willcome from banks, leasing companies or even individuals.

Naturally, lenders will assess the risk of any loan made and determinewhether or not the borrowing company is capable of repaying the loanand associated interest.

Therefore, if you seek to borrow money in the form of a loan - from alender the primary consideration of the lender will be that you, or yourbusiness, will be able to repay that loan within a given period of time.

Also, the debt will in most cases be secured against assets of thecompany and/or the personal assets of the owner of the company thisis called a personal guarantee.

As a general rule of thumb, lending institutions (such as a bank) willonly offer 50% of the book value of the business assets.

Why?

Because if the business (the borrower) goes belly up the lendinginstitution would seek to liquidate the business assets rather than sellthem at market prices.

1.2 Equity Capital: Equity capital is any money given to thebusiness in exchange an investor taking a share of ownership in thecompany in which they invest.

Typically, equity capital usually comes from individual investors,

sometimes referred to as angel investors, or business angels.

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Equity investors are completely different from debt capital providers.

Whereas debt capital providers are mainly concerned with getting theirloan back (plus interest), an equity investor because they have a sharein the business - are more interested in the potential growth of a

company.

An equity investors greed glands are generally fuelled by thepotential business growth of a company.

Likewise, its important to realise from the outset that if you go theequity capital route you may be giving up a major interest in yourbusiness. Think TV programme Dragons Den.

Obviously, youll need to take these considerations into account.

Here is an illuminating quote from page 70 of Felix Denniss bookHow To Get Richto drive home the point:

Time and again I have watched existing companies wishing to expand,or new ventures anxious to get started, mire themselves with the slipperydolphins (venture capitalists). A few of them succeed, and succeedgloriously, it has to be said. But a great many other original owners orcreators are squeezed out long before the `fabled pay day.

If you fail to grow your business swiftly enough, then flipper (the

venture capitalist)becomes agitated and noses in. His very survival (or atleast his annual bonus) depends upon your performance that year. Flipper(the venture capitalist)doesnt care about long-term prospects. He doesnteven care about long-term shareholder value. He only cares about growth and he cares about it now.

In any case, equity capital investors will go over your business figureslike a hawk; evaluate the market strength of your product or service;determine the likely competition from others offering a similarproduct/service; the size of the market for that product as well as thequality of your business management team, etc.

So the question is:

What kind of investment capital is right for you?

2.0 Debt Capital Investment Or Equity CapitalInvestment?

To decide, you will need to be clear on several fundamental questions.

Namely:

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1. Exactly why does your company require extra capital?2. What is the current financial condition of your company?3. How much investment capital do you require?4. What stage of growth is your company at? (i.e., start-up,

product line or market expansion etc).

5. What constraints will the investment capital put on the day-to-day running of your business?

6. What impact will the investment capital have on your company?Only after youve answered the above basic questions (along with

others only you know to ask of yourself) will you determine whether debtcapital or equity capital is right for your business.

Lets look at each question in a little more detail:

2.1 Exactly Why Does Your Company Require Extra Capital?

As a rule of thumb:

Debt capital investment is generally sought and used for financing theday-to-day running of a company -- or to re-finance an existing loan.

Whereas, equity capital investment is generally sought and used forbusiness start-ups or to scale up an existing company.

Although the above is not cast in stone.

But, before you can decide on the most appropriate sources ofinvestment for your company youll also need to know how yourbusiness is doing

2.2 What Is The Financial Condition Of Your Company?

In certain situations, your companys financial situation will steer youtoward one kind of funding over others.

For example:

If your company is in its start-up phase and youre looking forinvestment capital to get the business off the ground and established its unlikely the business has money in reserve to pay off a loan and theassociated interest.

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In which case youre likely to be steered toward equity capitalinvestment possibly business angels.

Alternatively, if your company is already established and youreseeking investment to fund manufacturing an increased order of a

certain type of widget then youre more likely to be steered towarddebt capital investment (in the form of a loan or overdraft).

Likewise, any lender or investor will look at and crunch the numbersof any business theyre assessing and will be swayed by what story thosenumbers tell.

2.3 How Much Capital Does Your Company Require?

If your business only requires a small amount of investment capitalfor a short period of time (i.e., to get over a temporary cash flow problem) most big fish investors will not be very interested.

In which case, a bank loan could be the most effective solution. Orperhaps a temporary loan from a friend or family member.

Investors are generally not interested in small fry companies orsmall amounts of money (less than 10,000) or even companies thatdont have big growth potential. After all, an investor has to do the sameamount of due diligence whether investing a small or large amount.

With that being said, a large amount of capital investment may onlybe obtainable by a company if a small amount of capital initially helps todetermine the viability of a product or business.

For example, your company has an idea for cancer diagnosticequipment. Lets say for a moment that this equipment if brought tomarket would practically eradicate all forms of cancer.

The investment you need to bring the equipment to market is say, 4million.

However, the initial funding required may only be 50,000 - toperform a research and patent search to see if any other company isworking on the same idea and, the size of the market, etc.

Would this mean that a big fish investor would notbe interested ininvesting a paltry 50,000?

Not necessarily.

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See, if the preliminary search shows that no other company is working

on the idea and that the target market is every doctors surgery andhospital worldwide, the second stage investment could be, say 500,000 -


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for manufacturing the equipment, hiring design consultants; and,developing the business plan, etc.

And if the design team develop a prototype piece of diagnosticequipment then another, say 2,000,000 more investment may be

required to further develop the prototype and patent it.

Subsequently, after the working prototype is patented then another1,450,000 investment may be required to obtain the appropriateregulatory approval etc.

2.4 What Stage Of Growth Is Your Company At?

From an investors point of view, the stage to which your company hasprogressed will be a good indicator of the risk associated with putting upinvestment capital.

Naturally, any company has to go through different stages: i.e., seedstage; start-up; 1ststage, 2ndstage, etc.

Heres a quick guide to the different business stages:

Seed Stage: The idea for a product or company is in the mind of thefounder, but there is still substantial research and developmentnecessary to determine whether the idea is viable.

Start-up:The company has a business plan, a defined product, andbasic structure, but little or no revenues are being generated. Theproduct may still be just a prototype.

First-stage: The product is either ready for market, or is generatingsome revenues. The structure of the company is in place.

Second Stage:Full scale production. The companys product hasbeen selling and accepted by the marketplace. The company is ready fora major national introduction of the product or introduction of a secondproduct.

Established: The company has been operating successfully for atleast three years.

Turnaround: the company has been operating for a number of yearsbut is under-performing. A hard turnaround refers to a company that isnot only under-performing, but has been in a cash deficit position withlittle or no hope of returning to a positive position without majorrestructuring.

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And the more established a company is, the less the likely riskinvolved in putting up investment capital.


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2.5 What Constraints Will The Financing Source Put On The

Day-To-Day Operation Of Your Company?

You need to think very carefully about how your companys operations

may be affected or limited by the source of any investment capital

If you secure a loan, covenants may be tagged onto the loan that mayrestrict what your company can do with any excess cash as it becomesavailable.

Such covenants (usually buried in small print) may also put limits onhow much your company can spend. And covenants may also exist thatrestrict the way your company presently offers credit to certaincustomers.

If such covenants exist, you may decide that theyre just too restrictivefor your company.

Likewise, if you secure equity capital investors, you may very well findthat your investors want to get too involved with the management of yourcompany.

Sometimes accepting certain kinds of investment capital is just tooexpensive! So do your homework and know exactly what youre signingup for.

2.6 What Impact Will The Investment Capital Have On YourCompany?

Sometimes an injection of money alone is not going to solve abusiness problem.

In which case, the ideal type of investor for your company may be abusiness angel, who will not only invest money, but also bring marketing,management or other skills. Or maybe even introduce you to high-quality contacts within your industry.

Once youre clear in your mind about exactly why you needinvestment capital and what those funds will do for your business youllhave a mental filter through which to analyse the various sources ofinvestment capital available to you.

How Much Investment Capital Do YouNeed?

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Believe it or not, having too much investment capital thrown at youcan have detrimental effects on your business.


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In other words, too much money often causes otherwise intelligent,

careful and well-reasoned business people to do truly stupid things!

And remember

The more money an equity investor ploughs into your business thegreater share of your business they will want. In other words, youll begiving up a bigger controlling interest in your business.

On the other hand, underestimating how much investment capital youreally need is almost like taking one-step forward, two-steps back.

Having to go through the whole process of raising cash all over again,or having to go hat in hand to your original investor because youunderestimated the amount of capital required is not very professional.It also severely lowers a potential investors confidence level in yourbusiness management skills.

As a guide to accurately determine the true amount of investmentcapital you require, its advisable to carry out a cash-flow projection andadd on a buffer of say 10% to 20% for all the eventualities that could gowrong.

Granted, this kind of planning can be like pulling teeth to most screwit; lets do it entrepreneurs. But crunching the numbers for your

business and putting together some kind of financial plan beforeapproaching potential investors can save you a lot of heartache and alot of money further down the line.

Knowing your business numbers will also give you rock solidconfidence and professionalism when you get in front of potentialinvestors.

Make some kind of financial plan, and put together some kind ofcontingency plan in line with hope for the best, but plan for the worst.

Heres just a partial list of things to take into consideration whendetermining how much investment capital your business requires andcoming up with some kind of contingency plan:

Product will take longer to introduce into the market. Product manufacturing costs will escalate. Delays associated with regulations and patent approval.

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Wrongly assuming certain credit lines or payment terms will beavailable to your type or size of business.


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Of course, these are just a few of the challenges that can really

unsettle your business.

So, plan accordingly and only take on as much investment capital as

you really need.

3.0 Creative Methods Of Financing:

Dont want to take on debt or sell any equity in your company?

Youll soon realise theres more ways to raise finance or makefinance available than you might first imagine

3.1 Joint Venture Partners:This is where two (or more) companies combine their efforts,

resources, skills or assets, to reach a goal which would be difficult toreach by just one company alone.

In fact, if you understand and know how to set up joint ventures youdont even need a business of your own to raise money. Instead, all youdo is find two existing complementary businesses and then connectexisting supply and demand.

Simply locate a business that already has a pool of customers andagree with that business to endorse another non-competing (yetcomplementary) product or service that would likely also be wanted bytheir customers and you would take a percentage of the extra revenueresulting from all new revenues.

For example, lets say there are both a chic clothing boutique and ajeweller in your town or city. And the clothing boutique has a databaseof 2,000 customers who buy from her on a regular basis.

You make an agreement between the clothing boutique and the

jeweller

You would arrange for the owner of the clothing boutique to send averypersonalisedletter to each of her customers explaining that shedlike to treat them to a very special offer. She could explain in her letterthat if her customers take their letter into the local jewellers store - theywill get, say, an exclusive 20% discount off any piece of jewellery.

Assume that only 200 of the clothing boutiques customers takeadvantage of this exclusive offer. And lets assume the average amount

spent by eachcustomer at the jewellery store is only 200.

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This amounts to 40,000 new-found revenues at the jewellers. Andyoud arrange it so everybody wins and is rewarded financially.

Of course, if you already have a business of your own you cancontact other complementary businesses and set up joint venture deals

with them direct.

Naturally, its beyond the scope of this report to cover all the finedetails of approaching potential joint venture partners and setting upprofitable deals. But, here are just a few more ideas for locating potentialjoint venture partners:

Look in trade journals and search newspapers ormagazine adverts - if a business is advertising its aftermore business!

Search around online The Internet is first and foremost auseful research tool

List types of companies that promote and sell productsor services that are complementary to yours.

Attend trade shows, networks, chamber of commercemeetings, etc.

3.2 Vendor Financing:If you have a good relationship with your vendors, it may be possible

to get them to agree to finance part of your company in return forextending their terms of payment on orders, etc.

Of course, this may be a little more difficult to pull off if youre a newbusiness, with no established relationship with vendors. But, nothing isimpossible

What harm is there in showing potential vendors your business plan

and documents of orders already received? Those vendors may like thelook of what youre setting out to achieve with your business and want toinvest in your company.

And possibly, you could guarantee a potential vendor with the optionof becoming your exclusive supplier for an agreed length of time inexchange for longer credit terms, etc.

3.3 Customers That Prepay:

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If your customers are happy that you deliver your goods to them on

time, you may be able to persuade them to put a deposit down on future


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orders. Of course, youd make this a favourable proposition by givingthose customers a discounted price on their order.

Lets say you carry out periodic work for your customers. Say onceevery month. And currently your customers pay you for the service

rendered each month.

You could write to those customers reminding them of the great workyou do and how they could save a substantial amount of money bypaying you a yearly up-front retainer fee for your services. Or possiblyquarterly.

A guy named Bob Stupak used this very idea to take a run-down slotsonly parlour in the dog-eat-dog world of Las Vegas and, in a few shortyears, turn it into a 530-room hotel and casino 100% debt free paid foras he added each floor and each square foot and running at over 80%occupancy.

His marketing involves an irresistible offer, along with an up-frontpayment to redeem the offer.

Bob runs full-page adverts in USA Todayand many other printpublications. In these ads, and in hundreds of thousands of direct mailpromotions sent out each year, Bob makes an irresistible offer example:

Two nights lodging in a deluxe room, unlimited free cocktails,

champagne, free show tickets, and, $1,000 of his money to gamble with all for just $396 per couple.

So many people take up Bobs offer. He sells more than the 15,000people per month he could accommodate if everybody redeemed theirtickets immediately.

This means he sells envelopes of vouchers for the $396 paymentsmonths, in some cases years, before the purchases actually makereservations and show up for redemption. And ends up with hundreds ofthousands of dollars - interest fee.

3.4 Trade and Barter:

Trade and barter represents one of (or perhaps even the most)rewarding and financially lucrative forms of business commerce.

Instead of using your own cash to buy things you can barter.

Barter give you the amazing ability to vastly increase your purchasingpower -- sometimes by as much as five to ten times over.

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You can quite literally write your own credit line with no expirationdate to unlimited amounts of money. It really is one of the best types ofmonetary leverage.

To give you a quick example heres how one business owner (of a

radio station) used barter to meet his employees wages:

He simply traded advertising to a local hardware store for fourteenhundred electric can openers, which he then easily converted to cash(sold) over the air to generate enough income to save the station.

Seeing he was onto a good thing, the radio station owner begantrading a number of different goods for advertising air time. Within 60-days the small radio station was in the black.

So he further expanded the seller-on-the-air concept to localtelevision.

When this also proved successful investors backed the concept intoa satellite uplink and went national.

The companys sales now exceed 1 billion a year. And it all startedwith the wacky idea of trading airtime for fourteen hundred can openers.

By the way, the company is now called the Home Shopping Network.Perhaps youve heard of them!

3.5 Franchising:Franchising is selling the rights to use your business, its name,

products etc, in exchange for a cash payment and royalties.

If you have a proven, systemised business model, franchising is a wayof leveraging your business system and through the sales of thefranchise, its a possible way of raising capital.

Obviously, the fine details of franchising a business is beyond thescope of this report. But if your business can be replicated, it may besomething you want to consider further

3.6 Licensing:

Licensing is selling the rights to a product or business name. From alegal point of view -- licensing is more straightforward than franchising.

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Its simply a way to secure exclusive (or even non-exclusive) rights to

product and marketing system etc., that another company has alreadydeveloped and tested.


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So, maybe you could license your product or marketing system to

other companies in a non-competing location or country.

3.7 Asset Sales:

This is a reliable method of raising capital where the assets of yourcompany or part of them are sold off.

For example, you might own spare land or building or equipment thatyou can rent out or sell onto other businesses.

A quick idea: Lets say your business has machinery that is only usedat certain times throughout the day.

Maybe you could rent or sell time on the use of that machinery toanother non-competing business during quieter times throughout theday or even at night.

Another quick example:

Lets say you have a business that sells cars.

Naturally, not everybody that walks into your showroom is going tobuy a car from you. Well assume only 2 out of every 10 walk-ins end

up buying a car from you. 20% conversion to sales rate not bad.

But every prospect that doesnt buy from you will probably end upbuying sooner or later from another dealership. So you could refer yournon-buyers to another reputable dealership youve made an arrangementwith for a referral commission.

You can also work this scenario in reverse with the other dealership where they refer their non-buyers to you. Just this simple arrangementwill likely boost a 20% conversion ratio to 50%.

Every asset that your company has must be fully maximised if youexpect to succeed and compete in the future and raise funding alongthe way.

And dont forget: one of the most powerful and profitable assets yourcompany has (and it wont be found on a balance sheet) is yourcustomer/client/patient database ideal for joint ventures.

Truly, fortunes have been made and continue to be made by oneperson with the ingenuity to maximise the profit potential of an otherwise

overlooked, under-utilised and under-marketed database.

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Another often-ignored asset (that again wont show up on a balancesheet) is your specialist skills and expertise.

What do you do better than most other people? What do you knowthat others would like to know? What advice do others pay you for?

For example, lets say youre an accountant and know certain legalways that can save any business owners a small fortune.

Maybe that knowledge can be converted to an information product -like a report, book, course, audio CD, DVD.

You could then promote and sell this information product for a hugemark-up on cost and effectively leverage your expertise substantially.

People have become millionaires even multi-millionaires marketinginformation alone.

3.8 Consignment (Sale Or Return):

If you own a retail shop and need stock, you can ask potential vendorsif they will consign their products to you. This is more commonlyreferred to as sale or return.

So if the product does not sell its simply returned to the supplier.

Lets say you have a retail store with some unused space and youwant to experiment with what you believe would be a fast-selling product.

Just contact the supplier of this product and ask to display theirrange in your shop on a sale-or-return basis. What have either of you gotto lose?

3.9 Advertising Remnant Space.Any savvy space advertiser knows - you can either make a lot of

money, or lose your shirt, depending on what you pay for the advertisingspace.

For example, lets say you run half-page space ads in a newspaper, for10,000.

If that ad then pulls in 8,500 worth of orders youre down 1,500.

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However, lets say you buy what is known in the trade as remnant

space this is space in a newspaper or magazine that hasnt been soldprior to publication. Akin to an empty seat on a plane about to take off.


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If you can negotiate and buy newspaper or magazine space at

remnant rate, you can save a lot of money up to 50% off normal rates.

Hence, a 50% saving on the above example turns 1,500 loss in to a

profit of 3,500.

Another option (although a little more difficult to negotiate) is to get anewspaper, magazine, radio station or TV station to run your ad for noup-front cost in return for a share of the new revenues generated fromthe advert.

3.10 Investor Advertising:

The way this works is you get an investor to put up the money to buyadvertising space (or air time) or to finance a direct mail promotion -- andyou split the revenue generated by the advert between the investor andyourself.

Obviously, youll want to have at least tested the ad or promotion andhave a proven winner on your hands, before courting potential investors.

Naturally, youll want to have a simple agreement between yourselfand any investor.

3.11 Friends And Family:

Probably the most popular and widely used source of capital for smalland start-up businesses is friends or family.

In fact, friends and family can be your very best source of businessstart-up capital.

Truly, these people can be invaluable when youre boot-strapping afledging business enterprise.

Felix Dennis - one of the wealthiest businessmen in the UK - usedfriends, family, acquaintances and business colleagues to finance hisfirst business venture.

Did it work out? Well, Dennis is now conservatively worth around300 million and hes kept a 100% controlling interest in all his businessventures.

Heres a direct quote from Felix Dennis:

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Venture capitalists, major investors and bankers all have their part toplay in providing capital for individual and start up companies. But if it is


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at all possible, give me the fish (friends and family) over the sharks anddolphins (major investors and venture capitalists) every time. It may takea mite longer to get there, but youll be far richer, or at the very least,happier in the long run.

Even though you know these people well, its best to get them to signa loan agreement with a proper repayment schedule.

And if they want equity in your new company, then show them adetailed business plan, setting out the possible risks involved. Again,ask them to sign a statement saying they have read the plan.

3.12 Home Equity Loan:

Like many home-owners, you may have built up a fair amount ofequity in your home.

If so, most mortgage companies are happy to lend you a portion ofthat equity. And in most cases, if your credit rating is good, you canhave the cash in your hand within 30 days.

Or you could be offered a second mortgage and draw on the money asand when you need it.

However, be aware: if you default on a second mortgage, you will lose

your home for much less than its market value. Also, watch out forunregulated lenders.

Do your homework. If you choose this option (or a variation thereof)know exactly what youre getting into before you sign on the dotted line.

3.13 Credit Card Financing:

If you dont mind living on the edge of credit card debt, you can useyour plastic friend to inject your business with some much neededcash.

Lets face it - most entrepreneurs have used credit cards to purchasesupplies or equipment at various points of their business life.

If your credit rating is good, the credit card companies will bethrowing cards your way. Get 4 or 5 cards at once, each with creditlimits of 5,000 to 10,000 and you have another possible source ofcapital.

By the way, Im not saying its a good idea to plunge yourself into debt.

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A credit card is just a tool to be used carefully and sensibly.

3.14 Royalty Financing:

Royalty financing is where an investor receives a percentage of the

revenues generated by your company rather than a percentage ofownership.

In such cases, the investor will get paid first, before taxes, debts andinterest owed even if profits are low.

If the company is sold or goes public, the investor may have an optionthat allows him to purchase shares in the company at below market rate.

Accordingly, this kind of financing is generally only suitable for acompany with a high gross margin or low cost of goods sold.

It can be a bit tricky finding royalty financing. If you choose to go thisroute, the best bet is to start talking with your accountant or solicitor.See if they can introduce you to a suitable investor possibly one of theirother clients.

Okay, those are just a few of the creative financing techniques that areat least worth knowing about.

By using and combining a few of these techniques, you could save

yourself having to source capital investment from the more traditionaloptions available.

Now follows more options related to traditional business financing

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4.0 Angel Or Private Investors:

4.1 Angel Or Private Investors

If youre after venture capital to help start up your business, yourelikely to find venture capital firms are not particularly interested in newcompanies. Instead, venture capitalists prefer to come in when thecompany is more established in terms of product development andsecuring customers.

In contrast, wealthy individuals - often termed business angels orangel investors - are by far the most important source of equity capitalfor start-up or early stage companies.

Most likely, these people have been successful entrepreneursthemselves. They understand all the trials and tribulations of forming anew company. And many business angels have extensive businessexperience (its how they made their money in the first place) and cantherefore offer support with technical, marketing and organisationalskills.

Not to mention having a potential goldmine of key contacts within theindustry theyre most likely to invest in.

However, that said, some angel investors are open to more diversebusinesses investments. It all depends entirely on the individual investorand their investment ethos.

If you want some idea of a business angel, then think of the TV hitprogramme Dragons Den without the entertainment and drama!

If you approach an angel investor you really must be prepared. Knowyour business numbers thoroughly. Have a detailed, complete businessplan. Be courteous. And know in advance what youre willing to giveaway.

Basically, an angel investor is looking for a company that shows it hasa good chance of growing rapidly and becoming valuable.

There are many business angel networks and matching services whichyoull readily find on on-line

4.2 Angel Networks:

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A bit like a dating agency, an angel network is there to introduce

suitable matches - between an entrepreneur (or business owner) and abusiness angel.


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Type business angels into Google and youre sure to find plenty of

networks. And you can check out these websites and get a feel for thetype of angel network and how each operates.

The benefit of these angel networks is that the entrepreneur is able toput their investment proposal in front of dozens of potential investors.

Another advantage of using an angel network is they often provideinvaluable advice and show you how to make an effective presentationand prepare you for the barrage of questions youre likely to be asked bythe investors they put you forward to.

The drawback to these networks is that they are deluged withhundreds, possibly thousands of proposals for investment. So expect toface a lot of competition.

4.3 Angel Online Matching Services:

Very much like the angel networks discussed above -- these online(only) matching services were set up originally with the idea thatentrepreneurs could submit summaries of their companies - in the hopeof getting attention from potential angel investors.

Thus, these business summaries would be posted online for viewingby potential wealthy individuals looking for suitable companies to invest

in. However, many of these sites disappeared by 2005, mainly due to thefact that a potential investor really needs to meet with you in person, inorder to evaluate your business..

Remember: A potential investor is not just investing in your businessentity. Theyre also investing in you as an individual.

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5.0 Business Incubators:

5.1 Non-Profit Business Incubators:

A business incubator is an entity that provides an environment thatallows an embryonic business to mature and grow into a healthy,thriving business venture.

And yes, there are even some non-profit incubators in existence.

The best thing about business incubators is that they offer an array ofsupport services for start-up businesses -- such as technical support,along with business and management assistance.

A business incubator will also often have access to sources ofbusiness finance capital. And potential investors usually look morefavourably on a company thats been accepted into an incubator.

Its also important to note that the type of company accepted into anincubator is usually rather restricted - as business incubators oftenspecialise in a certain areas of technology.

An associated benefit of specialist business incubators is theyll beable to steer you clear of the many mistakes made by other start-ups in

your industry.

In any case, if your business is accepted into a business incubatorprogramme, its likely your company will move into the incubatorbuilding - sharing office equipment, telephone and office staff in returnfor a monthly payment.

However, a lot of incubators will also require a part of the companysequity meaning you give up some control in your business.

5.2 Private Business Incubators:

Not so popular these days, these business incubators are formed by agroup of private investors. The services they offer are much the same asnon-profit business incubators.

As well as a fee for professional assistance, charges often include extrafees for telephone, computer usage as well as administrative services.

You need to weigh up which ones are more suited to your enterprise.

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6.0 Financing Programmes:

Apart from the most well-known sources of capital weve already

looked at, here are some other choices.

6.1 Purchase Order Financing:

Purchasing order financing usually works like this:

When you buy goods to fulfil one of your existing orders, then thepurchase order financing company may lend money to you to finance thistransaction

Typically, the purchase order finance company will only lend 50% -

60% of the purchase order cost. And in order for this source of finance tobe feasible, your company should have good profit margins.

Purchase order finance is useful if your company wants to place alarge order it wouldnt otherwise be able to place.

6.2 Factoring And Accounts Receivable Financing:

You can raise finance from the invoices you issue to your clients, via afactoring company..

You could also sell a group of receivable accounts. Or the factoringcompany may lend you money on either specific outstanding accounts, ora percentage of the total accounts receivable balance, which are usuallyno more than 30 days outstanding.

A couple of points to be aware of - this form of financing can bepotentially costly and you may also lose control over some of the cashflow of your company.

Although this type of financing can provide crucial working capital in

the period awaiting payment from clients.

If youre interested in this source of finance, look in the Yellow Pagesand also on-line using search terms like factoring, invoice discounting,etc.

6.3 Lease Financing:

You can lease new equipment, and there are many companies whowill help you with lease financing.

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There are also companies who will buy your equipment (for adiscount price) and then lease it back to you whereby you agree to leasefor a period of say, 3 to 5 years.

For example, if you have costly printing machinery that your company

purchased in the last year or so, the leasing company would buy theprint machinery from you at below market rate and you would thenagree to lease the equipment for a set period of time.

The same could work with raising finance through the leasing for acommercial property your company owns called a sale-and-leaseback.

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7.0 Finders and Intermediaries:

7.1 Finders, Intermediaries, Finance Consultants, InvestmentBrokers:

Many individuals (or finders) are willing to assist entrepreneurs inlocating business capital quite often for a finders fee.

These finders go under many different titles including brokers,agents, introducers, intermediaries, corporate finance consultants eveninvestment bankers!

Basically theyre all in the business of making money - out of findingyou money. But be very wary of any brokers who guarantee that theyll

find you an investor or loan.

Finders fees are usually based on a percentage of capital raised

Normally in accordance with the classic Lehmans formula, i.e.,typically the finders fee will be 5% of the first million investment, 4% ofthe second million, 3% of the third million and so on.

Brokers or intermediaries will usually charge an up-front or retainerfee, in order to start the investment search process. The amount of thisfee may vary widely from a few hundred pounds to several thousandpounds.

However, sometimes the broker will agree to deduct this retainer feewhen the investment money is found and the transaction provessuccessful.

Basically, if you are unfamiliar with the negotiation process withinvestors the terminology involved, procedure and its pitfalls then abroker can be of great help to you. They will also save you the timehaving to look for investors -- so you can concentrate your energies on

running your business.

A few other points about dealing with brokers and intermediaries:

Be realistic about the time you expect for them to find you thesource of capital you require.

Make sure they provide you with a list of all the companies theywill be showing your business plan to.

Dont just rely on one person to bring in the capital. Its importantfor you to carry on networking and searching yourself.

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8.0 Grants:

8.1 Business Grants The Basics:

A business grant is a sum of money given to a business for a specificproject or purpose.

A business grant will usually only cover part of the costs involved inthe project it is intended to fund. However, as long as you keep to all theconditions and stipulations of the grant you will not have to repay it.

Grants to help with a variety of businesses are available from a widerange of sources such as the government, European Union, RegionalDevelopment Agencies, Business Link, local authorities and even somecharitable organisations.

These grants may be linked to business activity or a specific industrysector. Also, some grants are linked to specific geographical areas (i.e.,those in need of economic regeneration).

Again, it is beyond the scope of this report to delve into the multitudeof grants available. But you can easily find many resources on-line.

So, if you want to find out more about the specific grants available to

you or your type of business its also best to first talk with your localauthority or a local business link adviser.

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9.0 Traditional Lending Sources:

Traditional loans can be divided into two categories: conventional

bank loans and special development loans.

9.1 Conventional Loans:

Banks are usually the first place an established company will go towhen looking to raise finance. As banks like to lend money to businessesthat have a high probability of being able to repay the loan.

Thus, banks favour lending money to established companies that havea good record of profit and a history of healthy cash flow.

This is why most start-up businesses do not qualify for a bank loan.

Unless possibly you can show you have enough personal assets toguarantee the loan. If so, any subsequent loan will be to you personally -rather than your company.

As you may know, if you go to the bank for a business loan you willoften have to provide financial statements for both yourself and yourcompany.

A business plan will also be required most of the time.

Your loan may have to be guaranteed personally against any assetsyou have in order to pay off the loan if the business is unable to.

And its worth remembering that it takes time to secure a bank loanas with any other type of financing. So make sure you begin the process6 to 10 weeks before you realistically need the money.

Heres a few things to keep in mind if you intend to approach the bankfor a business loan:

Prepare A Cash Flow Forecast:

It is imperative to prepare a cash flow forecast in order to determinehow much capital you will need, and how and when the loan will be re-paid, etc.

These cash flow forecasts are extremely important to the bank.

At the end of the day, the bank wants to know that your company will

have enough cash flow to pay back the loan with specified interest.

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Prepare A Detailed Business Plan:

The bank will also require a detailed business plan, which will showyour ability to plan and organise your company. Naturally, these skills

will also reflect your ability to pay back the loan.

Prepare A Detailed Loan Proposal:

You should prepare a brief description of the loan you need what itwill be used for and how you intend paying it back. This is known as aloan proposal.

Here is a brief summary of information that should be included inyour loan proposal:

Name of the borrower. Amount of loan required. What the funds will be used for. Type of funding you need. Term of the loan i.e. number of years before it can be paid off. Rate suggested interest rate based on your own research of

current market conditions.

Repayment schedule: when you will repay the money. Date: when you actually need the money. Takedown: let the banker know if you intend using the money in

stages.

Guarantees if owners are required to offer personal guarantees. Assets from the business that may be pledged as security. How you will pay the loan back where is the money coming from?Thus, the loan proposal highlights several things. It shows you are

professional. It also shows you respect the banks concerns and you areshowing in your proposal how you intend to meet those concerns.

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Most importantly through your loan proposal - you are telling the

banker your financing needs in a well thought out and reasoned way -and so youre more likely to get the loan you want.

Understand How Banks MakeDecisions:

Whereas Investors have a long-term interest in an investment, andventure capitalists weigh up the risks of losing everything versus earninglarge rewards -- the bankers main priority is that the loan clients cash-flow will be adequate to repay the principal loan, with interest accordingto the precise schedule agreed upon.

Accordingly, companies with the following criteria are the bestcandidates for bank financing:

A profitable company. An experienced management team with integrity and a track record

of success.

The company has maintained adequate working capital levels. Good accounting systems in place. Willingness to keep the bank informed with reports, updates, etc. Profits in keeping with or exceeding others in the same industry. A management team which can deal with rapid growth as well as

maintain profits.

Willing to put the bank before other creditors.Obviously, the above profile is that of a company that is already

somewhat successful -- but wishes to increase its growth and requiresfurther capital to accelerate that growth.

9.2 Revolving Credit Line:

A revolving credit line is drawn upon as and when needed.

Typically, revolving credit is used for seasonal cycles within abusiness and, in most cases is paid back within a year.

9.3 Letters of Credit:

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A letter of credit is a mechanism by which an exporter (seller) ships

goods with a guarantee of payment from the importer (buyer) if thecorrect documentation is presented and verified by the bank that hasissued the letter of credit.

Thus, a letter of credit provides security to the seller as it guaranteesthe bank will pay the seller the amount due. The buyer is also protectedbecause the bank will only pay if the documents comply with the termsand conditions set out in the letter of credit.

9.4 Special and Development Fund Loans:

Special funds may be available in depressed areas to encouragegrowth. Details of these will be available at your local authority offices.

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10. Venture Capital:

10.1 Venture Capital Firms:

Venture capital firms raise money from large institutions, such aspension funds and insurance companies.

They are mostly limited partnerships. Although a few may have someof their own money in the fund, the majority of their money comes fromoutside sources.

Generally, investments made by venture capitalists are directedtoward companies which are already established and just need extracapital for expansion or scaling up.

Very rarely will a venture capitalist direct its funds toward a start-upcompany the risks far outweigh the returns.

If you think venture capital is the answer to your financing problems it would be wise for you to look at the types of investments specificventure capitalist firms have made in the past. This will obviously saveyou a lot of time and increase your chances.

Want to know how to find venture capital companies?

Again, there are many resources online especially the website of theBritish Venture Capital Association (BVCA). Their on-line directorycontains a description of each firms investments, along with a lot ofuseful information.

When preparing your business plan for venture capitalists, you shouldinclude information such as the following:

The size of your companys market. Potential return on investment. Your companys potential for growth. The uniqueness of your companys product. The quality of your company management team.And so on lots more detail on the BVCA site!

10.2 Venture Capital Leasing:

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Some companies specialise in providing lease financing for equipmentto high-tech start-up companies.

This lease financing is provided for a higher fee to offset the risks.

10.3 Venture Capital Online Services:

Many firms offer broking services for locating business investment areonline.

Some of these broking companies offer a basic matching service -bringing together companies and venture capitalists.

However, the majority of venture capitalists do not need to use theseservices as they already have more than enough potential investments.

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11 Conclusion:Seeking and obtaining business capital can be quite a tough task.

No matter how passionate you are, or how much you believe in yourcompany not many people want to go trudging around hat-in-handlooking for investment capital.

But just about every wealthy, successful businessperson has beenwhere you are today.

Even the likes of Richard Branson and Donald Trump have had to golooking for finance to get their enterprises off the ground - many times onan ongoing basis.

Its just a part of the process of business so dont let anyone fool youinto thinking that there are short cuts.

However, hopefully this report has opened your eyes to a few specificways and options in raising finance and funding for your businessambitions and dreams.

And I hope youve found this report informative enough to want topass it onto others in business who might also find value in it.

At Smart Capital, we are very fortunate to have access to literally 100sof resources, contacts, networks and numerous sources of finance andfunding.

Thank you for reading and let me know how we can help further.

Good luck with your business ventures!

Des Vadgama

November 2007

Any questions/comments just email: [email protected]

Web: www.Smart-Capital.co.uk Tel: 0800 781 2281
mailto:[email protected]://www.smart-capital.co.uk/http://www.smart-capital.co.uk/mailto:[email protected]

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