Whether you are a startup or existing business, having sufficient capital is essential to growing a successful business. The lack of capital is also one of the primary reasons why many good ideas never develop into a business or why some companies never take that next leap into scalability. But once you understand where to find it, raising the necessary capital for your business will be in reach for most.
But before you start, you’ll need to understand what capital really is.
What is Capital?
“Capital” comes from the Latin word “caput,” meaning head, as in “head of cattle.” Capital assets are already produced durable goods and other non-financial assets used in the production of goods and services.
Notice I used the term, “non-financial.” Capital has less to do with money than it does about the resources that money buys you. Think about it, money does absolutely nothing for your business. It does not run the cash register, it does not create a website, it does not cook the food, etc. Get the point? Capital is the tangible resources needed to start and run the business.
So, when it comes to raising capital, you need to focus on what resources you need and how you can obtain them without cash. In other words, what do you have that you can potentially trade for what you need? Yes, that’s right, trade.
You may be thinking, that is old school and doesn’t happen anymore. That can’t be any further from the truth. Trade happens more than you think but it sometimes looks a lot different than how you envision.
Trade Capital for More Capital
One example of trade is bringing in an equity partner for your business. There may be an entrepreneur that is looking to develop a new app. Instead of having to spend a lot of money hiring a development team to build it, he can find someone(s) with the technical skills to complement the vision and access to distribution that the entrepreneur has. So the person(s) with the technical skills will trade their talent for a key equity position within the company.
Another example could be that you have a patent for a new product with a purchase order from a major toy distributor. You can negotiate with a manufacturer to exchange production of the new toy for a delayed payment (and additional services) plus future royalties on ongoing orders over a 1-2 year period.
Yes, the trades will take some doing and will require good sales skills with the right partner but the results will pay huge dividends.
By negotiating more trade versus taking out loans or raising private equity, you will have higher profit margins with cash that can be reinvested into the business for future growth because less will be paid out in the form of interest or dividends.
Slow Growth, Big Returns
“If I don’t get a loan or private equity, will this slow down my growth?” In the beginning yes, but in the long run you will see larger and more sustainable growth because you will have continually reinvested the money you would have otherwise been paying banks or investors.
What will you be reinvesting into? Every business needs some upgrades over time to stay relevant and ahead of the competition. A tech based business will need to continually reinvest into technology, software, and hardware. A retailer will need to upgrade equipment, furnishings, signage, security systems, etc.
Also, because your business will tend to be more cash rich than most, when the economy takes a dip, like it does every eight years or so, you will be in position to purchase many things at a cheaper price. i.e. equipment, land, services, etc.
Inventory Your Capital
You should take the time to list out your capital assets. This could be equipment, skills, business connections (network), knowledge, proprietary resources, etc. Just about everything is valuable to the right buyer.
Once you’ve listed your assets, determine what resources you need to take your business forward and figure out how to trade for what you need. If you focus on acquiring capital, then on how to get the money you need to buy capital, you will be able to start or advance your business on a more solid footing that will lead to sustainable growth.
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