A How-to Guide: Raising Capital For Your Business
Raising capital is can be an essential to the survival of a business. There are various financial sources for raising capital, from a bank loan, to an angel investor, from government grants to business incubators. Regardless of where you look for business financing, it is pretty important to have a solid business plan, and a way to present it.
During initial financial planning, many entrepreneurs will seek investments from multiple sources to create a varied capital strategy. It’s always better to have access to more money than not enough. Thinking broadly and diversifying financing options may help to accelerate fundraising goals. In fact, a strategic business plan should include a list of potential investment strategies for your new business. It is exactly what potential investors expect to see. It gives investors confidence that the entrepreneur is not leaving financial opportunities on the table to acquire sufficient capital.
“Try not to become a man of success. Rather become a man of value.”
– Albert Einstein
You will truly have to understand the fundamentals of a business idea, from your execution, day-to-day operations, bank statements, profit and loss statements, projections, marketing, and so forth.
We will go over different ways to raise capital for your business. You will learn about different financial institutions below and varied ways to raise capital for your new business or small businesses. If you’re ready to enter the shark tank, keep reading!
“Opportunities don’t happen. You create them.”
– Chris Grosser
Avenues to Raise Capital
A lot of local businesses start with self funding as their debt capital. If you’re willing to contribute money into your business, this proves to investors that you are committed and willing to take risks with your business.
A lot of business owners put their own money into their startup capital, and it can be manageable with small business administration. But the challenge her is whether the profit of the business will be enough to pay off that investment or grow. But it can be rewarding. One simple example of a personal investment turning dollars is those who purchase real estate themselves then rent it. If the housing market is hot in your city, this is an example of a good personal investment.
Another way of raising capital is raising money loaned by asking your spouse, friends, family or parents. The business owners repay this capital as soon as the money is made later in their business.
However, a few things to keep in mind: consider your relationship between your loved one. Also, how much money do they have and how much will be too much?
If the answer is complicated, you may want to legally spell out agreements and terms, as your loved one may want equity in your business or some sort of return of investment on your early stage startups.
Considering becoming a LP if this is the case. A limited partnership exists when two or more partners go into business together, but the LPs are only liable up to the amount of their investment. An LP is defined as having limited partners and a general partner, which has unlimited liability.
“I find that the harder I work, the more luck I seem to have.”
– Thomas Jefferson
Venture capitalists are looking for technology-driven businesses and companies with high-growth potential in technological and medical sectors. Venture capital firms take on projects that are promising but may also be high risk.
Because it is a higher risk, this involves giving some ownership or equity to an external party and your venture capitalists. A venture capital firm would also like returns on their investments, particularly when shares are available for the public. While this is a common way of raising money, you have to be sure your business ideas is state of the art or forward moving in order to gain the interest of a venture capitalist. A venture capitalist is probably more likely to fund a biomedical field or commercial real estate industry than say an accounting field.
Is working with venture capitalists right for you? You could seek financial advice prior to approaching one or any private investors.
“If you are not willing to risk the usual, you will have to settle for the ordinary.”
– Jim Rohn
Angel investors are wealthy individuals who invest directly in firms owned by others. Angel investors tend to finance the early stages of the business. Angel investors be invested in how the business is run. This often means an angel investor will be on the board of directors, and to keep your angel investment, you need to be transparent as a business owner.
In order to find angel investors, you will have to do a bit of researching finding those in your sector. You could look up an angel investor directory online, but other angel investors may tend to keep a low profile. Word of mouth and utilizing your own network to find an angel may be your best bet on securing an angel investment.
“The ones who are crazy enough to think they can change the world, are the ones that do.”
Business incubators provide support for new businesses in various stages of development, usually in state-of-the-art sectors like tech. Funding operations can help capital raising at any point of the development of small businesses. Even mature companies can benefit from a business incubator for their own business if it helps develop something new.
The incubation phase can last up to two years. Once the product is ready, the business usually leaves the incubator’s premises to produce their product on its own. This is much more of a research driven form of capital raising, but can be helpful for development that is long term compared to other financial institutions.
“There are two types of people who will tell you that you cannot make a difference in this world: those who are afraid to try and those who are afraid you will succeed.”
– Ray Goforth
Government grants and subsidies
Government agencies provide financing such as grants and subsidies. While many are available, getting grants can be tough. There is competition and criteria for the awards that you and your small business must fall into.
You will also need a detailed project plan and a clear explanation of why you need funding. This should be no challenge to entrepreneur. The only major pitfalls is that people often do not read the location eligibility of their grant or prove why they need the funding compared to others. If you make sure you fit the eligibility criteria and clearly spell out a need, you have a better change. You also have to prove that you can match funds eventually with some subsidies so read the fine print.
“Don’t let the fear of losing be greater than the excitement of winning.”
– Robert Kiyosaki
Bank loans or SBA loans
Bank loans are the most commonly used source of funding or debt capital for small and medium-sized businesses. Consider the fact that all banks offer different advantages, whether it’s personalized service or customized repayment. You will need good credit and a good business plan on this route.
Small business loans are commonly loaned through the bank if you ask them what your options are for small business loans. Small business owners often rely on these business loans when they cannot secure personal financing.
A small business loan is a great way to start capital raising and building credit for your business. It can be risky to pay off a business loan if you cannot generate income in the onset of your business, so you may want to consider another form of capital raising if this is the case for your business. (You wouldn’t want too many interest payments!)
“People who succeed have momentum. The more they succeed, the more they want to succeed, and the more they find a way to succeed. Similarly, when someone is failing, the tendency is to get on a downward spiral that can even become a self-fulfilling prophecy.”
– Tony Robbins
Debt financing is funding by means of debt capital happens when a company borrows money and agrees to pay it back to the lender at a later date. Debt financing occurs when a firm sells fixed income products, such as bonds, bills, or notes.
Loans and bonds are what larger companies use and smaller businesses sometimes even use business credit cards as well. (It may work if the card has a 0% APR for a certain period of time!)
“If you really look closely, most overnight successes took a long time.”
– Steve Jobs
While this requires a bit of marketing, if you have a good idea, you could crowdfund through the general public. Especially if you operate a niche sector, and you bring something innovative, this could be a great avenue if you have time to market your idea.
There are plenty of crowdfunding sites there available for use and are quite easy to use. Read the fine print and see how much they want from your total or each transaction as that can eat away at your capital.
Crowdfunding sites require some knowledge of the audience you’ll be pitching to. You also will have to incentivize their investment by rewards or future products. This may not be the greatest for say a business that is looking for time to research processes, but excellent for a company with a new product or patient coming to market.
“There are no secrets to success. It is the result of preparation, hard work, and learning from failure.”
– Colin Powell
Equity Capital or Equity Financing
Equity capital or equity financing is generated through the sale of shares of company stock. Equity financing is particularly useful for those who require funds to invest in their growth.
The one upside is with equity financing, there is no loan to repay. The business doesn’t have to make a monthly loan payment. This is useful if your incubation phase does not turn a profit immediately.
When working with stocks or partners, the business must give them a percentage of ownership in the company—which may also include some decision-making control.
“Don’t be distracted by criticism. Remember–the only taste of success some people get is to take a bite out of you.”
– Zig Ziglar
Invoice financing is a way for businesses to borrow money against the amounts due from customers. This is helpful if you work with large customers that insist on longer payment terms, and they provide business that is too valuable to turn away. Invoice trading could help you maintain these relationships with these customers.
In a nutshell, this can occur when a seller sells a good or service to a buyer.
You as the business, issues an invoice, and gives the buyer a window to complete the payment. You can’t wait say 90 days for the buyer to pay, so you sell the invoice to a financing company or an investor.
This company buys the invoice, and gives the seller a cash advance equivalent to approximately 80% minus a financing fee.
“There is a powerful driving force inside every human being that, once unleashed, can make any vision, dream, or desire a reality.”
– Anthony Robbins
Time to pitch!
“Success is not final; failure is not fatal: It is the courage to continue that counts.”
– Winston S. Churchill
We hope this article helps you get started in raising money for your business. There are a lot of different routes to go about funding your business that you can try.
While it can seem daunting, you could also make a strategy or game plan on how to approach different investors. Maybe one type does not work or you use one to leverage while you search for others. The strategy is where you can get creative in getting your idea out there.
“I never did anything worth doing by accident, nor did any of my inventions come indirectly through accident, except the phonograph. No, when I have fully decided that a result is worth getting, I go about it, and make trial after trial, until it comes.”
– Thomas Edison