Three ways to raise money without a bank

Take a look at these ideas. They may get your mind working on still more possibilities.

1. Offer to pay a major supplier a premium in exchange for extended credit

This approach may work if you have a single big supplier whose credit will fund a part of the business. In the case of a magazine, for example, this may be the printer, as printing costs may account for up to 25% of total expenses. An electrical supply company may approach the manufacturer of electrical goods for extended credit.

One potential downside of this approach is that high interest will usually be charged for the outstanding money. However, in many cases, the advantage of being supplied with products or services up front easily outweighs the disadvantages. You may have to offer the supplier company additional incentives in order to convince them.

Be prepared to negotiate. For example, a magazine may offer to advertise the company free of charge, or the electrical company may offer to conduct a free electrical installation for the client. When using this approach, success often comes down to a matter of trust.

It will also typically depend on some kind of relationship existing between yourself and the supplier. Someone who has held management positions in the field will typically be well known and will have developed a standing in the industry. A reputation for honesty, integrity and business acumen will go a long way when raising capital via this method.

2. Attract numerous small investors

Some of the greatest companies in South Africa were started by young entrepreneurs who had raised capital through many small investors, as opposed to a few large ones.

Not least of these entrepreneurs is Pick ‘n Pay founder Raymond Ackerman, who in 1967 went so far as to put in an offer for his initial three stores without the finance for it. The asking price of the stores was R620 000 and he offered to settle the asking price as R600 000 cash, with R20 000 provided in shares. The next few days became a nail-biting race of frantic intensity. Ackerman mustered up as much as he could, including the entire R100 000 bequeathed to him by his late father. He then went on to raise stakes of R3 000 each, made up of R1 500 in capital and R1 500 as a loan, from 53 investors - 25 from Johannesburg and 28 from Cape Town. The agreement was that interest on the loan would not be paid for the first two years. This gave him breathing space while he built up the initial outlets.

As only half the loans were capital, he easily retained control of the business. Ackerman's purchase was a success, and the business has since become one of South Africa's retail giants. Some of those original investors still hold Pick ‘n Pay shares today.

Another great businessman who accumulated his starting capital by attracting small investors is Liberty Life founder Donald Gordon. Forty-nine years ago, he drew up a document detailing his proposals for the formation of a new life insurance company, employing a radically innovative approach. It had been his dream to start a life insurance company since qualifying as an accountant in 1953.

With proposals in hand, Gordon set about raising the capital for his venture. After nine months of disappointment, frustration and rejection he managed to raise R84 000 from small investors. By September 1958, Liberty Life was on the road.

Back then, if you were one of the brave few to back Gordon with R1 000, it would be worth over R13.7 million today. Liberty Life is one of the leading financial services companies in South Africa, and the third largest insurance company listed on the Johannesburg Securities Exchange today. The company's assets currently amount to more than R144 billion.

Many a successful company has been formed through the accumulation of small investors. If you are that sure of your business concept, it may be the way to go.

3. Cash in your equity in long-term insurance

Surrendering your life policies to raise finance for a potential venture is an option to be considered with extreme caution.

Certain life insurance policies have an investment component that accumulates over time. The objective of paying a portion of your monthly premium over the years into an investment component is that eventually it starts paying for the life cover, and you no longer need to pay premiums.

The tricky part of this kind of policy is that, as your investment portion increases, so does the surrender value of the policy and this becomes a temptation if your business needs finance. The surrender value may be useful in your business, but in the long term you will almost certainly be losing.

The problem is that the surrender value is a fraction of the insured amount, and when it is withdrawn, the cover amount is significantly reduced. It is usually very difficult to build your life cover to the level that it was at before, and as you get older, the cost of life cover becomes far more expensive.

When starting a business it can be very tempting to surrender your life policies to raise capital and the risks need to be carefully examined. You should ask yourself, should it happen that you die and, without you, the proposed business does not take off, what life insurance payout will there be for your family? If this type of financing is seriously considered, your estate as a whole needs to be assessed as to whether you can afford to surrender a policy of this nature. If your business succeeds all may be good and well, but the risk you are taking is real. You could offset the risk by taking out a less expensive term life policy that does not build up equity. That can cover you with life cover. The advantage of this method is that the money is there immediately - you do not have to wait for financing. You have to make the decision whether or not it is worth the risk.

For eight more ways to get financing without a bank click here.

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