Raising Capital for Your New Business Explained

By Adam J. Heist

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Then, there are those businesses that lose money year after year, and it can be a mystery how they continue to amass investment capital and continue to grow. These are intangible values called “goodwill” that actually, in an adequate accounting statement, is put on the books. If the “Youtube” website is purchase for $1.5 billion dollars, it has to be explained to the stockholders of the purchasing company, why this money has disappeared from their assets, to buy a company that has never earned one dollar in the positive column. This value is chalked up to “goodwill” that the purchasing company has acquired. They have acquired a brand name and a distribution network that will be (hopefully) profitable enough to warrant the initial large investment that was spent.

How is it possible for businesses to lose money year after year? This is a process facilitated by raising capital. Some small businesses in the start of phase have great difficulty raising money on the capital markets or from investors. The owner is obliged to borrow money from his home equity, his credit cards, and any other personal assets he or she has.

In general, there are two ways of raising capital. You can get a loan, and go into debt, or you can sell part of your business, your equity, by selling shares. As your business becomes more established, it will be easier to get bank loans. Often companies selling goods sell part of their accounts receivable at a discounted rate of 10-20-percent or more. This is called factoring (of your accounts receivable), and has the advantage of accelerating a companies cash flow cycle. That is the time cycle it takes for money invested in producing new inventory to be sold, and for cash to be collected and deposited. Another source of loans is the U.S. Small Business Administration. It is worthwhile to check with the local Chamber of Commerce if there are other local or state government sponsored loans available to you. For example, many states and local governments have been making loans and even grants to promote energy efficiency and conservation is small businesses in the recent period.

Equity financing can include attracting capital from investors of various sorts. Of course, you can also lose control of some or all aspects of the business if you shell shares, but this can be a rapid way to raise capital. This is how firms that seem to lose money for years continue, because they are seen as developing an attractive brand or product.

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