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Smart Capital How to raise all the finance your business will ever need Des Vadgama

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 assumes any 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.

PREFACE:
If youve got a business or, simply the germ of a business idea and youre looking for investment capital this report will lead you through the 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 to survive and thrive. This is true for multi-national corporations, Internet dot-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 in its war chest to finance the business growth? Does this mean you have to kick your business growth plans into touch? Does this mean you have to dump your embryonic business idea altogether? Not at all. The aim of this report is to show you a variety of business financing options. And its sure to open your eyes to a flurry of financing options youve probably never thought of before. Granted not every financing option detailed in this report will be right for you or your particular business at this present moment in time. On the following page is an outline of the financing options thatll be discussed in this report. By the way, its best to read this report in the order in which it is presented. This way youll get a greater appreciation of the options available and itll spark ideas on how to fuse different options together. Any questions/comments just email: info@Smart-Capital.co.uk Web: www.Smart-Capital.co.uk Tel: 0800 781 2281

TABLE OF CONTENTS
1.0 The Different Types Of Capital.
1.1 1.2 Debt Capital. Equity Capital.

2.0

Debt Capital Investment Or Equity Capital Investment?


2.1 2.2 2.3 2.4 2.5 2.6 Exactly Why Does Your Company Require Extra Capital? What Is The Financial Condition Of Your Company? How Much Capital Does Your Company Require? What Stage Of Growth Is Your Company At? What Constraints Will The Financing Source Put On The DayTo-Day Operation Of Your Company? What Impact Will The Investment Capital Have On Your Company?

3.0

Creative Methods Of Financing.


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

3.14

Royalty Financing.

4.0

Angel Or Private Investors.


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

5.0

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

6.0

Financing Programmes.
6.1 6.2 6.3 Purchase Order Financing. Factoring And Accounts Receivable Financing. 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 9.2 9.3 9.4 Conventional Loans. Revolving Credit Line. Letters Of Credit. Special And Development Fund Loans.

10.0 Venture Capital.


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

11.0 Conclusion

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 must be 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 will come from banks, leasing companies or even individuals. Naturally, lenders will assess the risk of any loan made and determine whether or not the borrowing company is capable of repaying the loan and associated interest. Therefore, if you seek to borrow money in the form of a loan - from a lender the primary consideration of the lender will be that you, or your business, 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 the company and/or the personal assets of the owner of the company this is called a personal guarantee. As a general rule of thumb, lending institutions (such as a bank) will only offer 50% of the book value of the business assets. Why? Because if the business (the borrower) goes belly up the lending institution would seek to liquidate the business assets rather than sell them at market prices. 1.2 Equity Capital: Equity capital is any money given to the business in exchange an investor taking a share of ownership in the company in which they invest. Typically, equity capital usually comes from individual investors, sometimes referred to as angel investors, or business angels.

Equity investors are completely different from debt capital providers. Whereas debt capital providers are mainly concerned with getting their loan back (plus interest), an equity investor because they have a share in the business - are more interested in the potential growth of a company. An equity investors greed glands are generally fuelled by the potential business growth of a company. Likewise, its important to realise from the outset that if you go the equity capital route you may be giving up a major interest in your business. 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 book How To Get Rich to 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 slippery dolphins (venture capitalists). A few of them succeed, and succeed gloriously, it has to be said. But a great many other original owners or creators 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 at least his annual bonus) depends upon your performance that year. Flipper (the venture capitalist) doesnt care about long-term prospects. He doesnt even 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 figures like a hawk; evaluate the market strength of your product or service; determine the likely competition from others offering a similar product/service; the size of the market for that product as well as the quality 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 Capital Investment?


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

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-today 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 debt capital 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 the day-to-day running of a company -- or to re-finance an existing loan. Whereas, equity capital investment is generally sought and used for business 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 of investment for your company youll also need to know how your business is doing 2.2 What Is The Financial Condition Of Your Company?

In certain situations, your companys financial situation will steer you toward one kind of funding over others. For example: If your company is in its start-up phase and youre looking for investment capital to get the business off the ground and established its unlikely the business has money in reserve to pay off a loan and the associated interest.

In which case youre likely to be steered toward equity capital investment possibly business angels. Alternatively, if your company is already established and youre seeking investment to fund manufacturing an increased order of a certain type of widget then youre more likely to be steered toward debt capital investment (in the form of a loan or overdraft). Likewise, any lender or investor will look at and crunch the numbers of any business theyre assessing and will be swayed by what story those numbers tell. 2.3 How Much Capital Does Your Company Require?

If your business only requires a small amount of investment capital for 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. Or perhaps a temporary loan from a friend or family member. Investors are generally not interested in small fry companies or small amounts of money (less than 10,000) or even companies that dont have big growth potential. After all, an investor has to do the same amount of due diligence whether investing a small or large amount. With that being said, a large amount of capital investment may only be obtainable by a company if a small amount of capital initially helps to determine the viability of a product or business. For example, your company has an idea for cancer diagnostic equipment. Lets say for a moment that this equipment if brought to market would practically eradicate all forms of cancer. The investment you need to bring the equipment to market is say, 4 million. However, the initial funding required may only be 50,000 - to perform a research and patent search to see if any other company is working on the same idea and, the size of the market, etc. Would this mean that a big fish investor would not be interested in investing a paltry 50,000? Not necessarily. See, if the preliminary search shows that no other company is working on the idea and that the target market is every doctors surgery and hospital worldwide, the second stage investment could be, say 500,000 -

for manufacturing the equipment, hiring design consultants; and, developing the business plan, etc. And if the design team develop a prototype piece of diagnostic equipment 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 another 1,450,000 investment may be required to obtain the appropriate regulatory approval etc. 2.4 What Stage Of Growth Is Your Company At?

From an investors point of view, the stage to which your company has progressed will be a good indicator of the risk associated with putting up investment capital. Naturally, any company has to go through different stages: i.e., seed stage; start-up; 1st stage, 2nd stage, etc. Heres a quick guide to the different business stages: Seed Stage: The idea for a product or company is in the mind of the founder, but there is still substantial research and development necessary to determine whether the idea is viable. Start-up: The company has a business plan, a defined product, and basic structure, but little or no revenues are being generated. The product may still be just a prototype. First-stage: The product is either ready for market, or is generating some revenues. The structure of the company is in place. Second Stage: Full scale production. The companys product has been selling and accepted by the marketplace. The company is ready for a major national introduction of the product or introduction of a second product. Established: The company has been operating successfully for at least three years. Turnaround: the company has been operating for a number of years but is under-performing. A hard turnaround refers to a company that is not only under-performing, but has been in a cash deficit position with little or no hope of returning to a positive position without major restructuring. And the more established a company is, the less the likely risk involved 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 may restrict what your company can do with any excess cash as it becomes available. Such covenants (usually buried in small print) may also put limits on how much your company can spend. And covenants may also exist that restrict the way your company presently offers credit to certain customers. If such covenants exist, you may decide that theyre just too restrictive for your company. Likewise, if you secure equity capital investors, you may very well find that your investors want to get too involved with the management of your company. Sometimes accepting certain kinds of investment capital is just too expensive! So do your homework and know exactly what youre signing up for. 2.6 What Impact Will The Investment Capital Have On Your Company?

Sometimes an injection of money alone is not going to solve a business problem. In which case, the ideal type of investor for your company may be a business angel, who will not only invest money, but also bring marketing, management or other skills. Or maybe even introduce you to highquality contacts within your industry. Once youre clear in your mind about exactly why you need investment capital and what those funds will do for your business youll have a mental filter through which to analyse the various sources of investment capital available to you. How Much Investment Capital Do You Need? Believe it or not, having too much investment capital thrown at you can 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 the greater share of your business they will want. In other words, youll be giving up a bigger controlling interest in your business. On the other hand, underestimating how much investment capital you really 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 you underestimated the amount of capital required is not very professional. It also severely lowers a potential investors confidence level in your business management skills. As a guide to accurately determine the true amount of investment capital you require, its advisable to carry out a cash-flow projection and add on a buffer of say 10% to 20% for all the eventualities that could go wrong. Granted, this kind of planning can be like pulling teeth to most screw it; lets do it entrepreneurs. But crunching the numbers for your business and putting together some kind of financial plan before approaching potential investors can save you a lot of heartache and a lot of money further down the line. Knowing your business numbers will also give you rock solid confidence and professionalism when you get in front of potential investors. Make some kind of financial plan, and put together some kind of contingency plan in line with hope for the best, but plan for the worst. Heres just a partial list of things to take into consideration when determining how much investment capital your business requires and coming 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. Wrongly assuming certain credit lines or payment terms will be available 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 make finance 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 to reach by just one company alone. In fact, if you understand and know how to set up joint ventures you dont even need a business of your own to raise money. Instead, all you do is find two existing complementary businesses and then connect existing supply and demand. Simply locate a business that already has a pool of customers and agree with that business to endorse another non-competing (yet complementary) product or service that would likely also be wanted by their customers and you would take a percentage of the extra revenue resulting from all new revenues. For example, lets say there are both a chic clothing boutique and a jeweller in your town or city. And the clothing boutique has a database of 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 a very personalised letter to each of her customers explaining that shed like to treat them to a very special offer. She could explain in her letter that if her customers take their letter into the local jewellers store - they will get, say, an exclusive 20% discount off any piece of jewellery. Assume that only 200 of the clothing boutiques customers take advantage of this exclusive offer. And lets assume the average amount spent by each customer at the jewellery store is only 200.

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This amounts to 40,000 new-found revenues at the jewellers. And youd arrange it so everybody wins and is rewarded financially. Of course, if you already have a business of your own you can contact other complementary businesses and set up joint venture deals with them direct. Naturally, its beyond the scope of this report to cover all the fine details of approaching potential joint venture partners and setting up profitable deals. But, here are just a few more ideas for locating potential joint venture partners: Look in trade journals and search newspapers or magazine adverts - if a business is advertising its after more business! Search around online The Internet is first and foremost a useful research tool List types of companies that promote and sell products or services that are complementary to yours. Attend trade shows, networks, chamber of commerce meetings, 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 for extending their terms of payment on orders, etc. Of course, this may be a little more difficult to pull off if youre a new business, with no established relationship with vendors. But, nothing is impossible What harm is there in showing potential vendors your business plan and documents of orders already received? Those vendors may like the look of what youre setting out to achieve with your business and want to invest in your company. And possibly, you could guarantee a potential vendor with the option of becoming your exclusive supplier for an agreed length of time in exchange for longer credit terms, etc. 3.3 Customers That Prepay:

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 giving those customers a discounted price on their order. Lets say you carry out periodic work for your customers. Say once every month. And currently your customers pay you for the service rendered each month. You could write to those customers reminding them of the great work you do and how they could save a substantial amount of money by paying you a yearly up-front retainer fee for your services. Or possibly quarterly. A guy named Bob Stupak used this very idea to take a run-down slots only parlour in the dog-eat-dog world of Las Vegas and, in a few short years, turn it into a 530-room hotel and casino 100% debt free paid for as he added each floor and each square foot and running at over 80% occupancy. His marketing involves an irresistible offer, along with an up-front payment to redeem the offer. Bob runs full-page adverts in USA Today and many other print publications. In these ads, and in hundreds of thousands of direct mail promotions 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 15,000 people per month he could accommodate if everybody redeemed their tickets immediately. This means he sells envelopes of vouchers for the $396 payments months, in some cases years, before the purchases actually make reservations and show up for redemption. And ends up with hundreds of thousands 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 purchasing power -- 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 expiration date to unlimited amounts of money. It really is one of the best types of monetary 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 fourteen hundred 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 began trading a number of different goods for advertising air time. Within 60days the small radio station was in the black. So he further expanded the seller-on-the-air concept to local television. When this also proved successful investors backed the concept into a satellite uplink and went national. The companys sales now exceed 1 billion a year. And it all started with 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 way of leveraging your business system and through the sales of the franchise, its a possible way of raising capital. Obviously, the fine details of franchising a business is beyond the scope of this report. But if your business can be replicated, it may be something you want to consider further 3.6 Licensing:

Licensing is selling the rights to a product or business name. From a legal point of view -- licensing is more straightforward than franchising. Its simply a way to secure exclusive (or even non-exclusive) rights to product and marketing system etc., that another company has already developed 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 your company or part of them are sold off. For example, you might own spare land or building or equipment that you can rent out or sell onto other businesses. A quick idea: Lets say your business has machinery that is only used at certain times throughout the day. Maybe you could rent or sell time on the use of that machinery to another non-competing business during quieter times throughout the day 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 to buy 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 up buying sooner or later from another dealership. So you could refer your non-buyers to another reputable dealership youve made an arrangement with 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 arrangement will likely boost a 20% conversion ratio to 50%. Every asset that your company has must be fully maximised if you expect to succeed and compete in the future and raise funding along the way. And dont forget: one of the most powerful and profitable assets your company has (and it wont be found on a balance sheet) is your customer/client/patient database ideal for joint ventures. Truly, fortunes have been made and continue to be made by one person 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 balance sheet) is your specialist skills and expertise. What do you do better than most other people? What do you know that others would like to know? What advice do others pay you for? For example, lets say youre an accountant and know certain legal ways 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 huge mark-up on cost and effectively leverage your expertise substantially. People have become millionaires even multi-millionaires marketing information alone. 3.8 Consignment (Sale Or Return):

If you own a retail shop and need stock, you can ask potential vendors if they will consign their products to you. This is more commonly referred 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 you want to experiment with what you believe would be a fast-selling product. Just contact the supplier of this product and ask to display their range in your shop on a sale-or-return basis. What have either of you got to 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 advertising space. For example, lets say you run half-page space ads in a newspaper, for 10,000. If that ad then pulls in 8,500 worth of orders youre down 1,500. 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 sold prior 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 a newspaper, magazine, radio station or TV station to run your ad for no up-front cost in return for a share of the new revenues generated from the advert. 3.10 Investor Advertising: The way this works is you get an investor to put up the money to buy advertising space (or air time) or to finance a direct mail promotion -- and you split the revenue generated by the advert between the investor and yourself. Obviously, youll want to have at least tested the ad or promotion and have a proven winner on your hands, before courting potential investors. Naturally, youll want to have a simple agreement between yourself and any investor. 3.11 Friends And Family: Probably the most popular and widely used source of capital for small and start-up businesses is friends or family. In fact, friends and family can be your very best source of business start-up capital. Truly, these people can be invaluable when youre boot-strapping a fledging business enterprise. Felix Dennis - one of the wealthiest businessmen in the UK - used friends, family, acquaintances and business colleagues to finance his first business venture. Did it work out? Well, Dennis is now conservatively worth around 300 million and hes kept a 100% controlling interest in all his business ventures. Heres a direct quote from Felix Dennis: Venture capitalists, major investors and bankers all have their part to play 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 and dolphins (major investors and venture capitalists) every time. It may take a 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 sign a loan agreement with a proper repayment schedule. And if they want equity in your new company, then show them a detailed 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 of equity in your home. If so, most mortgage companies are happy to lend you a portion of that equity. And in most cases, if your credit rating is good, you can have the cash in your hand within 30 days. Or you could be offered a second mortgage and draw on the money as and 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 for unregulated 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 use your plastic friend to inject your business with some much needed cash. Lets face it - most entrepreneurs have used credit cards to purchase supplies or equipment at various points of their business life. If your credit rating is good, the credit card companies will be throwing cards your way. Get 4 or 5 cards at once, each with credit limits of 5,000 to 10,000 and you have another possible source of capital. 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 of ownership. In such cases, the investor will get paid first, before taxes, debts and interest owed even if profits are low. If the company is sold or goes public, the investor may have an option that allows him to purchase shares in the company at below market rate. Accordingly, this kind of financing is generally only suitable for a company 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 this route, 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 their other clients. Okay, those are just a few of the creative financing techniques that are at 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 traditional options 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, youre likely to find venture capital firms are not particularly interested in new companies. Instead, venture capitalists prefer to come in when the company is more established in terms of product development and securing customers. In contrast, wealthy individuals - often termed business angels or angel investors - are by far the most important source of equity capital for start-up or early stage companies. Most likely, these people have been successful entrepreneurs themselves. They understand all the trials and tribulations of forming a new company. And many business angels have extensive business experience (its how they made their money in the first place) and can therefore offer support with technical, marketing and organisational skills. Not to mention having a potential goldmine of key contacts within the industry theyre most likely to invest in. However, that said, some angel investors are open to more diverse businesses investments. It all depends entirely on the individual investor and their investment ethos. If you want some idea of a business angel, then think of the TV hit programme Dragons Den without the entertainment and drama! If you approach an angel investor you really must be prepared. Know your business numbers thoroughly. Have a detailed, complete business plan. Be courteous. And know in advance what youre willing to give away. Basically, an angel investor is looking for a company that shows it has a good chance of growing rapidly and becoming valuable. There are many business angel networks and matching services which youll readily find on on-line 4.2 Angel Networks:

A bit like a dating agency, an angel network is there to introduce suitable matches - between an entrepreneur (or business owner) and a business angel. 22

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 the type of angel network and how each operates. The benefit of these angel networks is that the entrepreneur is able to put their investment proposal in front of dozens of potential investors. Another advantage of using an angel network is they often provide invaluable advice and show you how to make an effective presentation and prepare you for the barrage of questions youre likely to be asked by the investors they put you forward to. The drawback to these networks is that they are deluged with hundreds, possibly thousands of proposals for investment. So expect to face 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 that entrepreneurs could submit summaries of their companies - in the hope of getting attention from potential angel investors. Thus, these business summaries would be posted online for viewing by potential wealthy individuals looking for suitable companies to invest in. However, many of these sites disappeared by 2005, mainly due to the fact that a potential investor really needs to meet with you in person, in order to evaluate your business.. Remember: A potential investor is not just investing in your business entity. 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 that allows 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 of support 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 of business finance capital. And potential investors usually look more favourably on a company thats been accepted into an incubator. Its also important to note that the type of company accepted into an incubator is usually rather restricted - as business incubators often specialise in a certain areas of technology. An associated benefit of specialist business incubators is theyll be able 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 incubator programme, its likely your company will move into the incubator building - sharing office equipment, telephone and office staff in return for a monthly payment. However, a lot of incubators will also require a part of the companys equity 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 a group of private investors. The services they offer are much the same as non-profit business incubators. As well as a fee for professional assistance, charges often include extra fees 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 the purchase order financing company may lend money to you to finance this transaction Typically, the purchase order finance company will only lend 50% 60% of the purchase order cost. And in order for this source of finance to be feasible, your company should have good profit margins. Purchase order finance is useful if your company wants to place a large 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 a factoring company.. You could also sell a group of receivable accounts. Or the factoring company may lend you money on either specific outstanding accounts, or a percentage of the total accounts receivable balance, which are usually no more than 30 days outstanding. A couple of points to be aware of - this form of financing can be potentially costly and you may also lose control over some of the cash flow 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 Pages and 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 who will help you with lease financing.

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There are also companies who will buy your equipment (for a discount price) and then lease it back to you whereby you agree to lease for 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 the print machinery from you at below market rate and you would then agree to lease the equipment for a set period of time. The same could work with raising finance through the leasing for a commercial property your company owns called a sale-and-leaseback.

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7.0 Finders and Intermediaries:


7.1 Finders, Intermediaries, Finance Consultants, Investment Brokers:

Many individuals (or finders) are willing to assist entrepreneurs in locating business capital quite often for a finders fee. These finders go under many different titles including brokers, agents, introducers, intermediaries, corporate finance consultants even investment bankers! Basically theyre all in the business of making money - out of finding you 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% of the second million, 3% of the third million and so on. Brokers or intermediaries will usually charge an up-front or retainer fee, in order to start the investment search process. The amount of this fee may vary widely from a few hundred pounds to several thousand pounds. However, sometimes the broker will agree to deduct this retainer fee when the investment money is found and the transaction proves successful. Basically, if you are unfamiliar with the negotiation process with investors the terminology involved, procedure and its pitfalls then a broker can be of great help to you. They will also save you the time having 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 the source of capital you require. Make sure they provide you with a list of all the companies they will be showing your business plan to. Dont just rely on one person to bring in the capital. Its important for 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 specific project or purpose. A business grant will usually only cover part of the costs involved in the project it is intended to fund. However, as long as you keep to all the conditions and stipulations of the grant you will not have to repay it. Grants to help with a variety of businesses are available from a wide range of sources such as the government, European Union, Regional Development Agencies, Business Link, local authorities and even some charitable organisations. These grants may be linked to business activity or a specific industry sector. 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 multitude of 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 local authority 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 to when looking to raise finance. As banks like to lend money to businesses that have a high probability of being able to repay the loan. Thus, banks favour lending money to established companies that have a 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 to guarantee 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 will often have to provide financial statements for both yourself and your company. A business plan will also be required most of the time. Your loan may have to be guaranteed personally against any assets you 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 loan as with any other type of financing. So make sure you begin the process 6 to 10 weeks before you realistically need the money. Heres a few things to keep in mind if you intend to approach the bank for a business loan: Prepare A Cash Flow Forecast: It is imperative to prepare a cash flow forecast in order to determine how much capital you will need, and how and when the loan will be repaid, 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 show your 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 it will be used for and how you intend paying it back. This is known as a loan proposal. Here is a brief summary of information that should be included in your 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 are showing 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 Make Decisions: Whereas Investors have a long-term interest in an investment, and venture capitalists weigh up the risks of losing everything versus earning large rewards -- the bankers main priority is that the loan clients cashflow will be adequate to repay the principal loan, with interest according to the precise schedule agreed upon. Accordingly, companies with the following criteria are the best candidates 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 requires further 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 a business 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 the correct documentation is presented and verified by the bank that has issued the letter of credit. Thus, a letter of credit provides security to the seller as it guarantees the bank will pay the seller the amount due. The buyer is also protected because the bank will only pay if the documents comply with the terms and conditions set out in the letter of credit. 9.4 Special and Development Fund Loans:

Special funds may be available in depressed areas to encourage growth. 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 as pension funds and insurance companies. They are mostly limited partnerships. Although a few may have some of their own money in the fund, the majority of their money comes from outside sources. Generally, investments made by venture capitalists are directed toward companies which are already established and just need extra capital for expansion or scaling up. Very rarely will a venture capitalist direct its funds toward a start-up company 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 specific venture capitalist firms have made in the past. This will obviously save you 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 the British Venture Capital Association (BVCA). Their on-line directory contains a description of each firms investments, along with a lot of useful information. When preparing your business plan for venture capitalists, you should include 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 equipment to 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 are online. 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 these services as they already have more than enough potential investments.

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Conclusion:

Seeking and obtaining business capital can be quite a tough task. No matter how passionate you are, or how much you believe in your company not many people want to go trudging around hat-in-hand looking for investment capital. But just about every wealthy, successful businessperson has been where you are today. Even the likes of Richard Branson and Donald Trump have had to go looking for finance to get their enterprises off the ground - many times on an ongoing basis. Its just a part of the process of business so dont let anyone fool you into thinking that there are short cuts. However, hopefully this report has opened your eyes to a few specific ways and options in raising finance and funding for your business ambitions and dreams. And I hope youve found this report informative enough to want to pass it onto others in business who might also find value in it. At Smart Capital, we are very fortunate to have access to literally 100s of resources, contacts, networks and numerous sources of finance and funding. 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: info@Smart-Capital.co.uk Web: www.Smart-Capital.co.uk Tel: 0800 781 2281

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