How To Attract Money for Your Business
by Bill Dueease

Your Personal "Coach" to Business Success

Virtually all businesses will need to attract money from outside sources to grow and prosper. Believe it or not, you have much more control over the success or failure of attracting money than you think. However, this can be and usually is a very frustrating, time consuming, and difficult process. Why is this? Because businesses probably do not understand what investors really want and need, and waste their energies and efforts in dealing with the wrong issues.

There are countless sources of funds: formal institutional sources (such as banks, and venture capitalists), friends, family, work associates, individual investors, suppliers, large purchasers, other owner/partner investors, and sometimes even customers. According to The Global Entrepreneurship Monitor (GEM), published by Babson College and Kauffman Center for Entrepreneurial Leadership, July, 1999, "the highly visible SBA loan guarantee programs help a large number of small firms, but only 2-3 percent of the total number of startups." The report goes on to say that less than $4 billion of the approximately $60 billion provided to startup firms come "from formal private equity sources (venture capital), and $56 billion (93% of the total) from informal private contributions," namely family, friends, associates, individuals, etc. Does this change your perspective of where you will most likely find funds?

First lets discuss the ways funds are delivered to your business. Outside funds are delivered through two basic methods.

One method is through a loan which entails lending money at an agreed interest rate (lenders profit) and the return of the original loan amount, within a set time period. Once the loan is paid off the borrower will own the portion of the asset covered by the loan. Mortgage loans on your home are an excellent example, because the repayment schedule you make each month includes an interest portion, a return of principal portion, and there is an agreed time period for the loan. The lenders must attain collateral to protect themselves for at least the outstanding principal amount. Collateral is almost always provided by a lien on assets that both parties agree to include. Normally your home itself is the collateral your mortgage lender uses to protect their loan. However, lenders rarely get an ownership in anything from the borrower.

Another form of a loan is a lease. Leases are really Loans for "The Right to Use." Leases are made on recoverable assets, include a monthly payment, and have a set time period, but you will not own the asset after the time period expires. Normally, the lease will include a Buy Out value of the asset, that you can pay to actually purchase it. Leases are very practical in many situations and should be considered when financing needs arise.

The other method is through an investment, which entails providing money and normally gaining an ownership interest with an opportunity to share in the profits, without any set payment schedule or time period. The best example of an investment is when an investor purchases stock in a company. The stock purchase entitles the investor to an ownership position in the company, which further entitles them to their pro rata share of profits which are paid with dividends. In addition, their ownership share allows them to benefit from the growth, success, and popularity of the company which will result in an increase in the stock value, which allows them the opportunity of additional profits in selling the stock for more than they paid for it. Notice that they get no collateral, other than their ownership in the company and they get no set repayment schedule for either profits or their original investment. Their profits and return of capital are normally dependent on the success (and/or perceived success) of the company.

For simplicity, we will refer to all forms of money providers as investors, whether lenders, leasing groups, partners, investors, or individuals.

The GEM report further states that "success in raising equity capital requires successful promotion of the business opportunity and close personal contact with sources of equity." Lets take a deeper look at how you can convince these "sources of equity" to provide money.

You will want to consider the true goals and desires of investors to attract their money. This means looking at the investments from their perspectives. Investors have much different perspectives and goals than you, and their goals are to:

1. Make a profit from the money they provide that is commensurate with the risk/reward ratio they are willing to accept;
   
   
2. Minimize or eliminate their involvement in the effort to create the business profits (let their money work for them);
   
   
3. Have a "good feeling" about the business. Most investors want and need to have some type of good emotional connection with the owner and/or their business. The stronger the positive emotional connection investors have, the greater the chances they will provide funds. This fact is frequently overlooked in the normal pursuit of financing.

Lets look at some potential investors("sources of equity) through their emotional perspective, from the highest positive connection to the lowest: you as an owner (highest possible emotional connection), your family and close friends (strong emotional bond to you), coworkers and business associates (respect and good feelings from working with you), potential vendors, manufactures, and businesses that market similar products (strong desire to benefit through their business), investors with good feelings about the field of the business (with emotional interests in improving the areas that the business benefits), investors that focus on businesses with new ideas (emotional ties to be part of something new, exciting, and profitable), money managers, investment groups, or corporations (sometimes called Venture Capitalists), stock underwriters (who thrive in the excitement and profits of taking new businesses public) and finally, traditional lending institutions (with the least amount of emotion and the greatest number of risk avoiding policies). When you evaluate potential investors in this emotional context, you realize why the percentages described above show that 93% of the total money invested comes from informal private contributions," namely family, friends, associates, individuals, etc. These and other investors become so emotionally attached, they forgot to verify their profit goal. The recent rise and fall of the dot-com businesses is an example of this. Investors of all types became so emotionally caught up in joining the new dot-com band wagon, with its glamour and speculation of untold riches, that they overlooked investigating if profits were actually possible, and practically threw billions of dollars at dot-com start ups. Do you think a big lesson has been learned?

When you convince investors that all three of their goals will be met, money will rain in. Investors will provide money, only when they are fully CONVINCED you are capable of and will fulfill ALL THREE of their goals. The most effective marketing tool used to convince investors of all three of the above is the Business Plan. A Business Plan is a formal document that has specific formats and information required, and can be a difficult process to complete.

You have much more control over how you acquire funds than you may recognize, and you exercise most of that control in creating an effective Business Plan, that presents your business in the best light to your targeted potential investors. The key is that the business must generate profits, and operate successfully without any effort from the investors. Your profit history and future profit capability of your business will be evaluated by investors to decide if they will want to invest. Your Business Plan should show Investors that the business itself will make enough total profit to cover all profit needs of the business AND repay investors their original investment and the expected profits.

Frankly, you are offering investors the "Opportunity" to invest in something they feel good about, will not have to work at, and can profit from, all at the same time. Such a deal!

Bill Dueease is a business owner coach who specializes in educating owners to increase profits, reduce stress, and gain time from and control over their business to reach their life goals. This article and others are provided as an educational service by Aspen Business Group. If you have questions, comments, or requests, you're invited to contact: