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    Rhonda and Andy: Why is it so difficult for most small business owners to raise the capital needed to start, operate, or expand their ventures?

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    Both Rhonda and Andy have joined your small business owners group and are recounting their troubles with acquiring their finances. This leads to a discussion on the following:

    Why is it so difficult for most small business owners to raise the capital needed to start, operate, or expand their ventures?

    How can a firm employ bootstrap financing to stretch its current capital supply?

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    It is often said that small business people have a difficult time borrowing money. This is not necessarily true. Banks make money by lending money. However, the inexperience of many small business owners in financial matters often prompts banks to deny loan requests.

    Requesting a loan when you are not properly prepared sends a signal to your lender. That message is: "High Risk!" To be successful in obtaining a loan, you must be prepared and organized. You must know exactly how much money you need, why you need it, and how you will pay it back. You must be able to convince your lender that you are a good credit risk.

    Also failure may be caused of the business owner doesn't have good loan proposal - failed to provide the following information in the loan request:

    When reviewing a loan request, the bank official is primarily concerned about repayment. To help determine this ability, many loan officers will order a copy of your business credit report from a credit-reporting agency. Therefore, you should work with these agencies to help them present an accurate picture of your business. Using the credit report and the information you have provided, the lending officer will consider the following issues:

    ? Have you invested savings or personal equity in your business totaling at least 25% to 50% of the loan you are requesting? (Remember, a lender or investor will not finance 100% of your business.)
    ? Do you have a sound record of credit-worthiness as indicated by your credit report, work history and letters of recommendation? This is very important.
    ? Do you have sufficient experience and training to operate a successful business?
    ? Have you prepared a loan proposal and business plan that demonstrate your understanding of and commitment to the success of the business?
    ? Does the business have sufficient cash flow to make the monthly payments on the amount of the loan request?

    In fact most banks want to see a two-or three-year trach record of business success before they will lend you money that's why its generally harder for small business to get start-up capital without previous proven success.(However, nowadays, credit cards let you buy what you need to launch your business without having to run it by a bank or investor.)

    Furthermore, since small business ownership is inherently risky...so they will not easily lend you money unless they think their return can compensate the risks involved.

    Failed to raise money can be caused by not able to let investor know the plan:

    The investor is seeking an above average return and a fun investment. That means that you must have a 5 year exit strategy prepared to propose before you even ask for the funds. Show the investor how he or she will cash out at the end, and why you believe the company will have the funds available at that time to pay the investor.

    After all, friends and family are generally the best place to start when raising equity capital. They tend to ask fewer questions and are typically more concerned about helping you succeed than they are about getting a whopping return on their money.


    I have excerpted an article from The Small Business Encyclopedia about bootstrp financing, please read the following:

    When you're thinking about how to raise money, one of the first things you should consider is bootstrap financing--using your own money to get your business off the ground. This is one of the most popular forms of internal funding because it relies on your ability to utilize all your company's resources to free additional capital to launch a venture, meet operational needs or expand your business.

    Bootstrap financing is probably one of the best and most inexpensive routes an entrepreneur can explore when raising capital. It utilizes unused opportunities that can be found within your own company by simply managing your finances better. Bootstrap financing is a way to pull yourself up without the help of others. You are the one financing your growth by your current earnings and assets.

    There are a number of advantages to using the various methods of bootstrap financing:

    ? Your business will be worth more because less money has been borrowed, and therefore, no equity positions had to be relinquished.
    ? You won't have to pay the high interest on borrowed money.
    ? Coming from a stronger position (with less ...

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