Everyone knows that you need money to make money. But how do you get the money in the first place?
Raising business capital can mean the difference between success and failure, whether you’re funding a start-up company, entrepreneur, or established organization. You might have heard a range of stats about small businesses failing — with 80% of startups failing within their first year, funding is vital to ensure your business ideas get off the ground.
How do you raise capital to start a business?
Setting up a new company requires more than an inspiring idea and business plan. You need start-up capital for business ventures to come alive. Businesses are expensive; you must pay for resources, employees, licensing, insurance, marketing, and more. Money doesn’t grow on trees, but there are plenty of ways to secure funding for your business.
Funding strategies range from launching a crowdfunding campaign to approaching investors or applying for loans. Throughout your organization’s lifetime, you might need to secure capital for your business to scale, modernize, and thrive.
Whether starting a side hustle for passive income or launching your new career, start-up capital is vital for success.
Why seek funding?
Whether your business is brand new or you have big growth plans, you may need additional funding for corporation finances. Sometimes, it might be as simple as boosting production, improving cash flow, or buying another company. Alternatively, you may need to apply for loans or seek new investors.
You might need to seek financial capital because:
- You need sufficient working capital to fulfill growth ambitions.
- You need to purchase new assets or equipment.
- You’re still in the start-up stage and need funding to get your feet off the ground.
- You need funds to expand operations.
Whatever your goals and fundraising methods, it’s vital for business owners to have a strong pitch. Communicating your business’ prospects strongly will support your funding efforts.
What are the three sources of capital?
There are three sources of capital: working capital, debt capital, and equity capital. You’ll typically rely on debt or equity capital as a start-up founder. However, established businesses already have revenue streams.
- Working capital represents the operating liquidity available and refers to a business that raises money by increasing production.
- Equity capital refers to businesses that issue shares or stocks to investors. In return for funds, shareholders own part of the business and receive dividends.
- Debt capital means taking on business lines of credit and loans to fund operations. You have to repay debts with interest.
Equity vs. debt capital
Businesses can use debt or equity capital to raise money for business finances. Debt financing usually costs less than equity, given debt has recourse—but both have pros and cons.
What is the difference between debt and equity capital? Debt usually comes in the form of bank loans or corporate bonds. On the other hand, equity financing is a form of cash exchanged for company stocks. Debt holders charge interest, while equity investors depend on stock appreciation or dividends for returns.
While borrowing money is a common capital-raising strategy, many businesses prefer not to take on debt (or more debt). Private equity firms may need to go public by issuing an initial public offering (IPO) for equity investments. Public companies may raise capital through an angel investor or VC firm.
Pros and cons of equity vs. debt capital
The main benefit of raising equity capital is that the company does not have to repay investments. Instead, shareholders rely on returns from market performance, receiving wealth from dividends and stock valuation.
However, the disadvantage of equity capital is that shareholders each own part of the business, diluting ownership. Shareholders each have a say in business decisions to ensure the company remains profitable.
On the other hand, corporate debt bonds pay a higher yield because they carry a higher risk. While this is an excellent method for funding your business, the downside is that you have the additional burden of interest. Interest payments are unavoidable and payable regardless of business performance. In a bad economy, businesses might find debt capital outweighs revenue.
How to raise capital?
There are many approaches to raising capital for funding operations. Depending on your business models, you might adopt one of the capital raising strategies below.
1. Bootstrap your business
If you’re operating in an industry that doesn’t require a lot of start-up capital, you might be able to fund your venture. Bootstrapping is a self-starting process that grows without external influence or assistance.
Even if you don’t have enough in your savings account, you might apply for low or no-interest business credit cards. A credit card will allow you to borrow smaller amounts of cash without interest payments. Banks might look at your credit score if you have no evidence of business finances.
Funding the business carries risk, but if you believe in your vision, you should feel comfortable investing in yourself. Moreover, investing in personal savings shows confidence that might boost your chances of external investment down the line.
2. Launch a crowdfunding campaign
Last year, according to data from Fundera, there were 6,455,080 crowdfunding campaigns. With the rise of social media, crowdfunding sites have taken off. Businesses use crowdfunding to raise money to launch their start-up, produce new products, or grow. Crowdfunding allows connecting with like-minded people who care passionately about your industry and business idea.
Unlike venture capitalists or investors, anyone can crowdfund. You might find loyal customers or members of the public donating as little as $10 or established investors offering large sums. Moreover, crowdfunding can help gauge interest in your products and services to understand what’s resonating with people and what’s not.
3. Apply for a loan
We mentioned debt capital. Business loans are the primary source of funding for small businesses. Small business loans offer favorable rates and terms. When applying for personal loans, you might need to meet the following requirements for approval:
- You have been in business for two or more years.
- Your business has a strong annual revenue (typically $100,000 or more).
- You have a good credit score.
You could opt for invoice financing if you have outstanding invoices to get money more quickly.
Alternatively, consider SBA loans if you cannot get a loan or line of credit from traditional financing institutions.
4. Ask friends and family
Asking friends and family to fund the business is a viable option for many. Consider people you know who might believe in your business plan and feel passionately about your vision. Ensure you are clear about the risks and be realistic about how much money you will need. Additionally, agree on what form the funding will take; it could be a loan or equity in your company.
5. Find angel investors
Accredited angels invest in businesses individually. An angel investor has a net worth exceeding $1 million or an annual income of more than $200,000 and typically operates alone.
To seek your source of funding from angel institutional investors, you should put together a solid business plan and prepare an excellent pitch. You need to capture their attention with enthusiasm and promising future business potential.
6. Venture capitalists
A venture capital (VC) firm typically wants to invest in more mature companies than angel investors. Therefore, venture capitalists are a good funding source for growing businesses with proven and scalable products. Venture capitalists are more involved in investor relations and may wish to have more say in managing daily operations.
Investors will want a pre-money valuation and regular post-money valuations to ensure you put their money to good use and practice proper wealth management.
Best practices for raising capital
The process of raising money for your business might seem intimidating. Here are a few best practices for raising capital.
- Due diligence: No matter the funding type, you must practice due diligence to ensure you get a good deal — especially with financing, venture capitalists, or angel investing.
- Organise yourself: Ensure you keep proper bookkeeping, whether a small business or bootstrapping. A venture capital firm, investors, or other financial institutions will determine whether your company’s books are in order. Ensure you have all the necessary documents and evidence to ensure your business checks out.
- Business pitch: Fine-tune your value proposition to sell yourself to others to convince them to offer the money to fund your organization. Showcase the aspects that make your business unique.
- Creativity: The fundraising process is competitive. On average, four million new businesses start every year in the US — meaning you have a lot of other entrepreneurs to compete against for start-up funding. Get creative with your fundraising efforts.
- Enthusiasm: Sharing your passion for your industry and your business idea will drum up more support, especially when crowdfunding.
How Do I Find Investors?
Reaching out to investors might seem intimidating. How do you get in contact with them? What should you say?
When approaching friends and families, you should prepare your pitch and professionally approach them. If you’re considering reaching out to angel investors or venture capitalists, you’ll need to get their contact details. Several online platforms connect business owners with investors.
Alternatively, you can speak to a broker about investment opportunities. A broker will help you organize a business valuation and match you with potential investors. They’ll provide expert advice throughout the transaction.
Businesses raise capital for all sorts of reasons. Whether an emerging company or a well-established online business, raising funds is vital for growth and success. With many opportunities to secure funds, ensure you carefully consider your options. Each business model will have different requirements. Think about the best approach for success.
Frequently asked questions
What is the cheapest way to raise capital?
The cheapest way to raise capital is to use retained or working capital — your funds and revenue from production. However, the best long-term solution might be to seek investors or apply for a business loan. That said, equity and debt capital costs more.
How can I raise money to start a business without a loan?
Business loans aren’t the only way to raise capital. Seeking investors or asking friends and family for funds is a viable way to raise money to start a business. Investors typically take a share of the company, diluting ownership. Friends and family might also take shares or offer the money as a gift or on a loan basis.
