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How to raise capital for your startup

Where should you get your capital?
By Entrepreneur Staff |

Capital is one of the most crucial things that you will need in starting your business. But where do you get it? listed down some of the possible sources of capital to startup your business.

The most common method to raise capital for a business is debt financing, of course, which means borrowing money that you have to pay back with interest within a certain period. Bank loans of this type are offered by such entrepreneur-friendly lending institutions as the Development Bank of the Philippines, Land Bank of the Philippines, and Planters Development Bank. However, debt financing will require you to have good credit, to put up collateral such as land or equipment, and to pay annual interest rates ranging from 9 to 13 percent. Even so, bank loans are preferable if a considerable amount is needed up front and if you don’t want to share ownership in your business once it succeeds.

Keep in mind, though, that bank loans are generally hard to qualify for because banks usually consider small to medium enterprises (SMEs) as high-risk loans. And in the event that your business venture fails, you may end up losing more than just your business assets but also your collateral to the bank.

Other possible sources of startup funding are government-initiated funding initiatives in support of entrepreneurship. They generally charge lower borrowing costs and require less stringent documentary requirements.

A third alternative for funding a business is equity financing, which is provided by so-called angel investors. Angel investors are a type of venture capitalist—they basically contribute money in exchange for equity or ownership, as opposed to lending cash. The main advantage of equity financing is that since you don’t have to pay back a single peso, all the funds remain in the business. In return, however, you are obliged to give away a significant amount of control and ownership of your business to the angel investor. Also, it may be difficult to find an angel investor for your particular kind of business.

Those who aren’t inclined to borrow from the sources already discussed may opt to tap their family and friends for loans. This is often the easiest since the relationships are already established and the loan terms could be more lenient. But this type of borrowing is also the riskiest because more than just money is at stake. Thus, even if you are not inclined to draft a contract for such borrowings, it’s highly recommended that you do so. It’s also best to have a solid business plan and maintain a professional approach even among your relatives and friends.

If you have existing connections in the industry, supplier credit schemes may be a good option for you, especially if you plan to maintain a stable supplier. Just be sure to practice good business ethics, for your failure to honor your part of the agreement can lead to the loss of a very valuable asset—your supplier.

Finally, you can raise money by selling some of your belongings through garage sales or by pawning them. If you have credit cards, you can also get cash advances through them for use as capital for a small startup business. Credit card debt is becoming more popular as a source of small business funding. This is because it eliminates the need for collateral as well as the risk of losing your personal assets in case of payment default.

However, you need to be prompt in paying the monthly dues for your credit card debt. Although you can roll over a few months’ installment debt, any problems in your payments for credit card debt will reflect badly on your personal bank record. Your credit line or the maximum amount that can be availed of through your credit card will depend on the particular bank and the credit line it gives you. Be aware, though, that the annualized interest on credit card debt could range from a low of 26 percent to a high of 30 percent, on top of your regular membership and interest rates.

No matter what method you choose for raising funds, however, it’s best to check your current finances and work out a viable plan for your prospective entrepreneurial venture. And you must ask yourself: Are your needs for funds short-term or long-term? How much risk are you comfortable with? Most important of all, you must have a real passion for your new venture to risk your savings and your borrowed funds for it.

This article was orignally published in the April 2008 issue of Entrepreneur Philippines.


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