Once a start-up’s financial needs exceed what personal funds, friends and family, and bootstrapping can provide, debt and equity are the two most common sources of funds. The most important thing an entrepreneur must do at this point is determine precisely what the company needs and the most appropriate source to use to obtain those funds. A carefully planned approach to raising money increases a firm’s chance of success and can save an entrepreneur considerable time.

The steps involved in properly preparing to raise debt or equity financing are:

Step 1: Determine precisely how much money the company needs

Constructing and analyzing documented cash flow statements and projections for needed capital expenditures are actions taken to complete this step. This information should already be in the business plan.

Knowing exactly how much money to ask for is important for at least two reasons. First, a company doesn’t want to get caught short, yet it doesn’t want to pay for capital it doesn’t need. Second, entrepreneurs talking to a potential lender or investor makes a poor impression when they appear uncertain about the amount of money required to support their venture.

Step 2: Determine the most appropriate type of financing or funding

Equity and debt financing are the two most common alternatives for raising money. Equity financing (or funding) means exchanging partial ownership of a firm usually in th...  Continue reading ››