9 Ways To Raise Capital For Your Small Business
Starting your own firm can be a daunting but rewarding process. Whereas a great business plan is vital for founders, business financing is one of the most significant elements a company requires to prosper. Nonetheless, financing a startup business or a small business can be a challenging, drawn-out process, mainly for those with poor credit scores. Whereas there is no standard minimum credit rating you should have to get a small business loan, conventional lenders have a range they consider acceptable. If you have a poor credit score and no collateral to provide, consider an alternative loan.
In this post, we will look at:
- What Sources Of Funding Are Available For Startup Business
- Bootstrapping (self-funding) your startup
- Crowdfunding is a funding option
- Angel investing for your startup business
- Raising capital from venture capitalists
- Raising money through bank business loans.
- Appy for SBA loan
- Raise funds through winning contests
- Merchant cash advance
- Business credit cards
- Seeking funds from accelerators and business incubators
What Sources Of Funding Are Available For Startup Business
Fundraising Sources For Small Businesses
Here is the ultimate guide that lists funding sources for new companies and small businesses that will help you raise money to start your business.
Bootstrapping (self-funding) your startup
Raising startup capital for your business through family and friends is a viable option for many. Following Global Entrepreneurship Monitor, five percent of the United States adults have invested in a business started by someone they know.
Self-funding, also called bootstrapping, is an effective way of startup financing, mainly in the early-stages of your business. First-time entrepreneurs usually have trouble getting business funding without first showing a plan for potential prosperity. You can invest from your savings or can get your friends or family to contribute. This will be simple to raise due to less compliances/ formalities, plus less costs of raising. In most cases, family and friends are flexible with interest rates.
Bootstrapping or self-funding should be regarded as a first funding option due to its advantages. When you have your own capital, you are tied to the company. At a later stage, investors regard this as a good point. However, this is suitable only if the initial qualification is small. Some businesses require money aid from day one, and for such companies, bootstrapping might not be a good option.
If you choose to get funding from friends and family, you must demonstrate passion and due diligence by having a solid business plan and direction. Also, ensure you agree on what form the funding will take; it can be a loan or equity in your business. If the money is a loan, then you have to agree on a repayment plan and utilize a P2P lending website to document everything and manage the loan.
Crowdfunding is a funding option
Generally, Crowdfunding is one of the newer methods of funding a startup that has gained a lot of popularity lately. It is like taking a business loan, contribution, pre-order, or investments from more than one person at the same time.
This is how crowdfunding campaigns work- a business owner will put up a detailed description of their nonprofit or profit business on crowdfunding platforms. The entrepreneur will mention the aim of their business, plans for making a profit, business model, how much funding they need, and for what reasons, and then customers can read about the company and give money if they like the business idea. Those providing money will make online pledges with the promise of pre-buying the product or giving a donation. Anybody can contribute money toward assisting a company that they really believe in.
Why should you consider Crowdfunding as a funding option for your company
The best part about crowdfunding is that it can also accumulate interest and assist in marketing the product and financing. This process can cut out potential investors and brokers by putting funding in the hands of common people. IT also might attract venture capital vc investment down the line if a business has mainly successful campaigns.
Generally, there are many success stories for crowdfunding campaigns, and with the right investor pitch decks and products, you can be one of them. For example, in 2013, Formlabs raised $3M on Kickstarter. This capital enabled the company to scale its operation and manufacture affordable 3D printers for the public. Gradually, the 3D printer maker caught the attention of venture capitalists. During a series A round, Formlabs closed $19 M in investors, providing them the chance to expand beyond their original goals. Note that crowdfunding is a competitive place to get funding, so not unless your company is rock solid and can obtain the attention of the average consumers through just a description and some images online, you might not find crowdfunding to work for you in the end.
Some of the common crowdfunding sites in the US include:
Get angel investors for your startup business
Angel investors are individuals with surplus money and a keen interest to invest in upcoming business startups. They also work in groups to collectively screen the proposals before investing. They can also provide mentoring or advice alongside capital. Angel investors have assisted in starting many prominent companies, including Yahoo, Alibaba, and Google. This alternative kind of investing typically occurs in a company’s early stages of growth, with investors anticipating up to 30-percent equity. Angel investors opt to take more risks in investment for higher profits. Angel investment as a funding option has its challenges too. Angel investors invest lesser amounts of money than venture capitalists.
Raising capital from venture capitalists: Get venture capital for your business
Venture capitals are professionally controlled funds that invest in businesses that have huge potential. They often invest in a business against equity and exit when there is an acquisition or an IPO (Initial Public Offering). VCs offer expertise acts and mentorship as a litmus test of where the company is going, assessing the business from the sustainability and scalability perspective. A venture capital investment might be appropriate for small businesses beyond the startup phase and already accumulating revenues. Fast-growth companies such as Uber, Flipkart, and others with an exit strategy already in place can gain millions of dollars that can be utilized to invest, network, and grow their business faster.
Nonetheless, there are a few shortcomings to Venture Capitalists as a funding option for a new business. VC firms have a short leash when it comes to business loyalty and usually looks to recover their investment with a window of three to five years. If you have a product taking longer than that to get to market, venture capital investors might not be very interested in you. They generally look for larger opportunities that are a little bit more stable, a business having good traction, and a strong team of people. You also have to be flexible with your company and sometimes give a little bit more control, so if you are not interested in too much mentorship, this might not be your best option.
Note that your pitch is a vital part of acquiring funding. You have to convey the main reasons why an investor should love your business in the first five minutes. You can do this in three steps:
- Explain what your business does: You have to show how your business can capitalize on this opportunity.
- Explain what has changed: Detail the innovation, industry shift, or challenge that presents a substantial opportunity for your business.
- Explain the facts: Get to your business’s story and financials faster. Layout the opportunity with numbers. You will discuss the co-founders and team and their experience and abilities.
Pros of Venture Capital
- The expertise and mentorship venture capitals bring to the table can also sustain a company or business effectively
- Venture capitals effectively monitor and evaluate the progress of a business they have invested in; therefore, ensuring the growth and sustainability of their investment.
- Businesses with astronomical growth rates like Uber have a pre-designed exit strategy that allows them to reap big profits that they can, in turn, re-invest in the growth of their business.
Cons of Venture Capital
- The business owner tends to lose control of your business because they are giving up a big part of it to venture capital investors.
- Venture capital investors seek bigger businesses with proven levels of stability and an identifiable workforce. This can be an obstacle since business startups do not often have this level of stability.
Note that there are thousands of VC firms, so think critically about your company and which venture capital firms make the most sense for your business.
Raising money through bank business loans
Usually, banks are the first place that business owners go when they think about funding. There are two types of bank loans:
- Working capital loan
Typically working capital loan is the loan needed to run one complete cycle of revenue accumulating operations, and hypothecating debtors and stocks often decide the limit. Funding from traditional banks would involve the usual process of sharing business plans and the valuation details., together with the project report, depending on which the loan is sanctioned.
You can look for banks that offer collateral-free business loans. Online lenders such as Top Financial Resources provide working capital loans by looking at real-life data, not just credit scores.
Apply for SBA loan
Even as technology designs new ways of raising startup, traditional financing products remain the primary way small companies fund their operations. Following the Small Business Administration (SBA loans), almost 75-percent of startup funding comes from small business loans, business line of credits, and credit cards. Typically, the small business loans with the most favorable financing rates and terms are going to be SBA loans and business term loans from banks and other financial institutions.
To get approved, you generally need to meet eligibility qualifications like the following:
|Time in business||Two years or more|
|Annual revenue||At least $100,000|
|Credit score||(Good credit score is needed) A minimum credit score of 640|
These are not hard and fast rules and will differ based on the lender. If you are not eligible for a term loan with a good APR, there are other costly types of funding accessible. If you have unpaid invoices, you can opt for invoice factoring or invoice financing to get that money faster. Or, if you need money for tech devices, equipment, furniture, or something similar, you can consider equipment financing. Before applying for a business loan, ensure you prepare any loan documents you will have to show ahead of time. You will be asked to show balance sheets, profit and loss statements, bank statements, and tax returns. In some cases, your personal information might be checked as well.
Raise funds through winning contests
Another great source for funds by engaging in competitions that require entrepreneurs to showcase or pitch their business module against other competitors who are vying for the same funding for their companies. As a contestant, you have to present an extensive and detailed business plan if you are looking to win over investor confidence.
Pros of raising funds through winning contests
- While participating in these contests and competitions, media coverage will be allowed to your startup business can demoralize the faint-hearted, therefore causing them to abandon their plans of starting up their business.
Merchant cash advance
Merchant cash advances are the opposite of a small business loan in terms of structure and affordability. Whereas this is a rapid way of securing funding, cash advances should be a last resort since their high expense. Generally, a merchant cash advance is where a financial provider extends a lump sum amount of funding and then buys the rights to a portion of your debit and credit card sales. Every time the merchant processes a debit card sale, the provider gets a small cut of the sale till the advance is paid back.
Whereas this appears to be convenient, cash advances can be very costly and troublesome to your business’s cash flow. If you can not qualify for a small business loan or any of the options for small businesses above, only then should you consider this funding option.
Business credit cards
Using a credit card to finance your small business should be treated the same way as a regular loan in that you have to think carefully about your capability to repay the money and keep your balance in check. Nonetheless, credit cards can provide you with a lot more in the way of floating resources. They make it simpler to get a smaller amount of cash when you need it, assisting you in keeping your balance in the positive while you are waiting to get paid. If some of your customers are late with their payments, it can impact your operations down the line. However, that does not have to be the case if you can cover the negative balance with the assistance of a credit card.
In fact, most modern companies depend heavily on perpetually open business lines of credit. This is valid for all sectors of the market, including larger companies. Bearing that in mind, you should definitely not be afraid to depend on credit lines to supplement your cash flow. This might be the best option you have in many cases.
Seeking funds from accelerators and business incubators
Companies that are just starting out can access funds offered by business incubators and accelerators. The programs provided by them can be found in major cities across the world. Slight differences separate business incubators and accelerators. Typically business incubators nurture the business, whereas accelerators fast-track businesses.
Deploying the tactics in this post can greatly increase the chances of survival of your startup business. Bootstrapping among other startup financing options outlined in this post is the best way to kick off your business campaign. Nonetheless, for start-ups to truly remain competitive, you should always interchange your business funding sources. This will provide you with some level of flexibility and over-dependence on one source of funding.