Negotiations with prospective investors often focus on how much capital will be provided, when the capital will be provided, what type of securities or ownership interest in the company will be purchased, and at what price. Thus, the process of raising capital to fund an Illinois start-up business can be complex, intimidating and sometimes frustrating for a new business owner or entrepreneur. More often than not, however, entrepreneurs who are serious about starting or growing a business have to manage the process of raising capital.
Sources for Raising Capital
There are many different sources of capital. Generally, they will fall into two primary categories: (1) debt financing, which means that the entrepreneur or business borrows money and repays it with interest; and (2) equity financing, which means money is invested in the business in exchange for an interest in the ownership. Sources of capital may include:
A business owner’s own money/resources (credit cards, home-equity loans, savings, 401(k) loans, etc.). Most prospective investors looking to invest in a company will want to see that the owners are also taking a risk with their own capital in the venture
The money/resources of the business owner’s family, friends, key employees, etc
Small Business Administration (SBA) loans, microloans, general small business commercial lending, etc. These sources are very common with new business owners but the loans do require the business owner to provide collateral for lender security.
Angels comprising of wealthy individuals, wealthy families, small investor groups, cashed-out entrepreneurs, etc.
Institutional investors who see hundreds of deals and only make a handful of investments each year. The new business must be in a very hot industry and the owner or entrepreneur will need a proven track record.
Entrepreneurs who are serious about starting or growing a business often need to manage the process of raising capital. A common mistake new business owners and entrepreneurs make in their quest for capital is raising too little or too much capital.
How Much Capital Does A Business Need?
A common mistake new business owners and entrepreneurs make in their quest for capital is raising too little or too much capital. When a new business owner or entrepreneur mis-budgets the actual capital needs of the business, he or she often loses credibility with prospective investor or lenders. If a new entrepreneur asks for too little, the cost of capital will usually be much higher and the process more painful if the entrepreneur has to go back and ask for more. If the new business owner asks for too much, he or she may turn off the prospective investor or lender. Worse, the entrepreneur may cause greater dilution or give up more of the ownership than was really necessary.