Raising capital is the most basic of all business activities, but it may not be easy; in fact, it is often a complex and frustrating process. However, if you have studied and planned effectively, raising money for your business will go as smoothly as possible.

1. What to Know Before You Try to Raise Capital
2. True Costs of Raising Capital
3. Startup Costs

Finding the Money You Need

There are several sources to consider when looking for financing. It is important to explore all of your options before making a decision.

Personal savings: The primary source of capital for most new businesses comes from savings and other personal resources. While credit cards are often used to finance business needs, there are usually better options available, even for very small loans.

Friends and relatives: Many entrepreneurs look to private sources such as friends and family when starting out in a business venture. Often, money is loaned interest-free or at a low interest rate, which can be beneficial when getting started.

Banks and credit unions: The most common sources of funding, banks and credit unions, will provide a loan if you can show that your business proposal is sound.

Angel Investors and Venture capital firms: These individuals and firms help expanding companies grow in exchange for equity or partial ownership.

 Learn how to raise capital for your business HERE

1. What to Know Before You Try to Raise Capital

Don't meet with potential investors until you've taken these five important steps.

There are five basics that must be in place before you sit down with potential investors. If any of these items is not fully at the ready, it does not matter that the others are 100 percent in place. Investors will not give you credit for having four out of five of these items in proper shape. Rather, they will notice the one area that needs a lot of work. Your venture's portfolio of disclosure and readiness must be complete, with nothing missing across the board in these five areas.

So what are these five important areas?

1. Have a final, airtight version of your business plan. The plan must be concise yet comprehensive in scope and provide enough details to satisfy all the questions that will no doubt be raised about your company's ability to accomplish its market objective.

2. Provide a personal financial statement of current income and past income (cash flow) for the past three to five years. As part of this personal financial disclosure, be prepared to demonstrate assets (home, stocks, pension funds, savings accounts) and liabilities (mortgage, car loans, credit card debts) in order to show a clear dollar value of your net worth.

Also, in this personal disclosure, it is very important that the investors see that the lead entrepreneur and founding management team have some capital at risk as well in the venture. Asking others to back your vision and market strategy is especially difficult when you do not have a single dime exposed to the risks of loss that the investors' capital will be exposed to, should the funding deal close.

3. Make sure the management team is completely in place. If you cannot bring these key people to the meeting, have signed letters from them agreeing to take certain positions in the company. Include detailed resumes regarding their background, education and experience qualifying them to deliver tangible results in your new venture.

Also, be sure your company has named a core board of directors to oversee operations, and leave one or two seats available for the investors to fill or have their agents join on their behalf. Also put together a formal advisory board of individuals who will work with the lead entrepreneur on referrals and contacts as the venture moves forward.

Finally, have your attorney and accountant provide letters and documents about the venture, such as: articles of incorporation, investment letters, opening balance sheet and income statements (when applicable), documentation on patents pending and other intellectual property and trademarks/copyrights in place or in process, and an initial capitalization sheet outlining the founding team's stakes in the venture. If there are a lot of missing pieces, the investors will not invest at this juncture until those items are in place and secure.

4. Get both supply-side and demand-side documents together. For example, if you've already approached vendors about supplying your company with materials and supplies, and if you've opened up good negotiations on possible terms and discounts, bring letters from these firms to the meeting. The letters should be on their letterhead and should state that they're already working with you in these matters. You should have also opened up some preliminary discussions with some potential buyers of your product or service in the targeted market. In the same manner, you should also bring letters from these people stating that you are in negotiations about some contracts that your new venture will be able to fulfill once the capital is raised.

5. Make sure your product or service is already being used by someone or by a company, at least in its beta test form. Have a working model of the device, or have a prototype of the product that the investors can touch and see in action. If it's a service, show how the pieces of the process are in place and how they are going to work together in delivering that service to your target clientele. An idea on a napkin is not going to get funded. That happens very rarely and is the stuff of entrepreneurial folklore.

2. True Costs of Raising Capital

You probably don't have a clue what it really costs to raise the capital you need to fund your business.

Factor #1: The Business Plan: While most entrepreneurs know they need a business plan to have any credibility with an investor, they just don't know what constitutes a good one, much less what they might have to pay to have one written. Generally, a solid business plan takes at least one month--and as much as three--to write and can cost from $0 (if you're confident you can write it yourself, which I would strongly not recommend!) to a more realistic range of $5,000 to $25,000.

Factor #2: Advisors: Any entrepreneur who thinks they know everything they need to succeed doesn't. There's just too much involved for one person to know. Therefore, it's extremely important for an entrepreneur to be able to (a) recognize their weaknesses, (b) find really good people whose strengths fill in those weaknesses and (c) persuade them to join their team. In my experience, the real trick is finding people who don't need any money but who'll agree to be compensated mainly to allow you to show your appreciation and also because they believe in what you're doing. One established way of compensating advisors is to offer to pay them in cash for the first three to six months they're involved. That way, if it doesn't work out, they received something for their time. After that, if everyone's still excited, they can agree to work for stock. So the cost of two to three advisors consulting with you for three to six months is going to be $7,500 to $15,000 (not including the cost of any stock you offer them).

Factor #3: Exposure (Marketing): If you can't find a way to get the major news networks to do a prime-time story on your company, you're probably going to have to spend your marketing money on:

- Hundreds of color copies of your business plan
mailing costs for those business plans
- Several breakfasts and lunches where you'll pitch your story
- Hundreds of dollars spent attending various seminars (costs include travel, lodging, etc.)
fees involved just to present your company to some organizations such as the Kiritzu Forum

Over a nine- to 24-month period, the cost of marketing your company to attract the capital you need will be anywhere from $25,000 to $75,000.

Factor #4: Due Diligence: Despite the fact that any professional investor will cover their own costs to conduct their "due diligence" on you, most entrepreneurial companies will need to spend some money upfront to prove they have a viable idea. This may take the form of certain types of market research, clinical trials or customer feedback. For example, it can cost as much as $5,000 to assemble and analyze just one qualitative focus qroup. And all these efforts go toward determining what it'll cost to make your idea believable to an investor. Over the course of three to 12 months, you'll spend anywhere from a low of $5,000 to as much as $100,000. This high side applies to companies that have a product or service that would cost a lot to validate.

Factor #5: Legal and Accounting Fees: No business can escape the need for good legal and accounting advice. Companies need to know how to set up their legal structure properly; how to solicit money; and which forms are the legal and correct ones to use. They must then file tax returns--even if they didn't make money. And if they have an idea worth protecting, they'll need a good patent attorney to help them out. You should figure that over the course of three to 12 months, you'll spend $5,000 to $35,000 on legal and accounting fees. The higher costs apply to companies that have some type of intellectual property to protect.

Factor #6: Salaries: Ideally, every company should have the attitude that no one gets paid until the revenues can support it, and I strongly support this concept. So despite the fact that most of you were hoping I'd have a line item for this one, I don't. If you can't afford to start your company without getting a paycheck, you'd better have a rich partner and/or relative willing to support your mad idea until it proves its brilliance.

So what's the bottom line? If you're not planning on this process taking six to 24 months and costing between $47,500 and $250,000 just to have a 3 percent probability of someone saying yes, then you need to reset your expectations. Finding funding for you venture will cost time and money. If raising money isn't your area of expertise, mistakes will add even more to these costs. Therefore, if any of the areas listed in this article are costing you more time or money than I've budgeted above, my advice to is to change your current advisors and get quality help ASAP!

3. Startup Costs

Every business is different, and has its own specific cash needs at different stages of development, so there is no generic method for estimating your startup costs. Some businesses can be started on a shoestring budget, while others may require considerable investment in inventory or equipment. It is vitally important to know that you will have enough money to launch your business venture.

To determine your startup costs, you must identify all the expenses that your business will incur during its startup phase. Some of these expenses will be one-time costs such as the fee for incorporating your business or price of a sign for your building. Some will be ongoing, such as the cost of utilities, inventory, insurance, etc.

While identifying these costs, decide whether they are essential or optional. A realistic startup budget should only include those things that are necessary to start that business. These essential expenses can then be divided into two separate categories: fixed expenses (or overhead) and variable expenses (those related to producing sales for the business). Fixed expenses will include things like the monthly rent, utilities, administrative costs, and insurance costs. Variable expenses include inventory, shipping and packaging costs, sales commissions, and other costs associated with the direct sale of a product or service.

The most effective way to calculate your startup costs is to use a worksheet that lists all the various categories of costs (both one-time and ongoing) that you will need to estimate prior to starting your business.

 Learn how to raise capital for your business HERE