Establishing a promising new company is great – but what next? You probably require a team, a custom website, some space for running your operations, and, of course, enough funds to cover your monthly rent. All that means you need to raise funding if you really want to get your venture off the ground in its early days. So, what are the best ways for a newly formed business to raise funds? Read on for a new business owner’s guide to where to seek capital from, and which kind might be right in your scenario.
1. Consider Family & Friends
Asking your peers and loved ones for funding might seem like an unattainable and intimidating task – but seeking help from your close circles is a great first step before looking at external options. Who knows, Grandpa John might be in a position to toss you a few grand to help you get started. Before you pursue this option, though, it’s important to be ready with a business plan.
That document will enable you to explain to them what you’re planning to sell, how are you going to price the product or service, how you’ll generate revenue, and whether the funding they provide is going to serve as an investment, a gift, or a loan. Hence, your loved ones will know if they’ll be getting back the money they’ll be putting into venture, and if so, what percentage of it.
2. Explore Providers of Equity Capital
If you need more money than you can gather yourself or borrow from friends and family, you may want to sell some part of your company in return. People who you can sell to include the following:
Refers to fund managers or investment companies that offer funding in exchange of part-ownership of businesses. They’re different from angel investors as they’re seeking potential partnerships to invest a big sum, which could be beyond what a small business owner requires, and their requirements are a lot difficult to fulfill. They may also refuse to play an active role in day-to-day operations, but take a role in the company’s board so they actively seek larger companies to fund.
Angles are individuals who invest in specific businesses because they find them promising (they’re running other businesses). However, they’re mostly going to invest in a company they’re familiar with, and expect a return in some form, such as in the shape of equity, or some percentage on total profits. The best part about this source of funding is that angel investors are usually opening to investing in businesses at early stages, which can help with initial operations. Plus, they put their own mistakes and experiences on the table, which can provide new business owners with the knowledge they need to enter new markets, price products, create audience personas, and more.
Just remember that both angle investors and venture capitalists are professionals that expect to view a proper business plan before they’re approached with investment requests.
3. Don’t Neglect the Option to Bootstrap
Many successful companies have been bootstrapped. Their owners financed operations by scraping all their personal funds they could find together. Personal funds typically involve home equity lines, credit cards, savings accounts, and any amount owed to you. In several instances, using your own funds instead of raising capital from external sources is a great idea – in fact, many entrepreneurs will continue bootstrapping their ventures until they see a profit.
This can be an advantage because it removes the burden of monthly returns and interest rates. Hence, you won’t have the pressure to return borrowed money, which can bog down the greatest of finds if managed improperly. However, for scaling on an immediate basis, it can be useful to consider external funding sources. That said, you can seek consultancy to know whether or note the expected sales in your pipeline would be sufficient enough to support the growth you’ve planned. Who knows, you might not need outside capital, or even have to sell a part of your business.
4. Look into Crowdfunding
Crowdfunding is one of the best options out there for newly established businesses when it comes to raising money. Generally, it’s a way to raise capital from separate investors; however, it is a unique aspect that comprises of several forms of funding from varying sources. A few options include Indiegogo and Kickstarter, where budding entrepreneurs can reach out to the general public for funding projects or upcoming products, which is an attractive source should you require expansion cash.
In return for investments like these, you’d need to offer something to the investors. For example, you could tell them that they’d be first to receive your product once it undergoes final release. Similarly, you can offer to put their names on the product team list. It can work for all types of ventures. Even a book publishing business can use crowdfunding sites to raise capital for self-publishing reads, whereas they could find it challenging to secure a traditional loan to fund books (especially when they don’t have an established name in the industry to back up their request).
Crowdfunding works best if your product is unique. It allows you to reach out to several thousand investors at any given time through a variety of channels. Investments can be rewards-based, debt or equity. However, before testing waters in this arena, do your research as here are several hundred crowdfunding platforms out there on the web, and they include fake ones too.
5. Expand Your Search to Microloans
Microloans are categorized as small loans, but the difference is that the requested loan amount is below USD 50,000. Hence, they’re often quicker and less challenging to secure than a traditional bank loan. In the US, organizations like Accion allow new businesses that may not gain access to capital to get loans up to USD 25,000. Groups like these offer microloan deals specifically to certain types of businesses, like food and beverage companies as well as day-care ventures.
Also, the Small Business Administration (SBA) of the US offers microloan programs, and utilizes several approved lenders. It can directly provide startups and new companies with a loan up to USD 50,000, and US-based entrepreneurs can visit their local SBA branch to connect with a microlender. Other options include Kiva Zip, where the individuals in a community act as microlenders to fund small businesses.
6. Invoice Financing
If delayed payments are affecting your cash flow and getting in the way of business proceedings, the option of invoice financing can work pretty well. It allows companies, regardless of the stage they’re in, secure advances based on the unpaid, late invoices’ value. Hence, you could free up the amount you’re owed, as well as free up your time to concentrate on important areas of your operations, as opposed to running after investors.
In this scenario, a factoring firm will be accessing your invoices’ quality and value before coming to the conclusion whether or not there are potential risks involved with giving you money. When approved, you’ll be able to get a sum worth a specific value of your invoice. Later, they’ll be the ones collecting money from your customers, and taking back the charge they’re owned before any change is returned to you.
7. Debt Capital
Common forms of debt capital include credit card debt, bonds and bank loans. Also, businesses can accumulate additional funding during expansion by opening lines of credit or apply a new loan. These sorts of funding are known as debt capital because most businesses will be signing a contract that says they’ll have to repay the money at a later time. With the exception of money borrowed from generous relatives, debt capital carries with it additional interest burdens. The expense is known as the expense of debt capital.
Assuming you request a $100,000 loan that carries with it an annual interest rate of 7 percent. If you’re going to repay that loan one year later, it’s going to be $1o7,000 worth with interest. Of course, not all lending institutions require you to repay loans that quickly, so the quantity of compound interest on such a big sum can add up pretty fast. In fact, interest accumulation is one of the biggest shortcomings of debt capital. Moreover, the loan must be repaid to the lender regardless of how your business performs.
Hence, in case of a low season, even good performing businesses can carry debt payments which, in some cases, can exceed their annual revenue. However, because it is guaranteed that lenders are going to receive payments on outstanding debts (even if the revenue doesn’t provide cover), debt capital costs tend to be less than equity capital costs in the case of many borrowers.
Now that you’ve aware of the options available to you for raising capital, you can begin to move toward scaling your business. Go out there, raise enough capital, and start running operations like a boss!