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Seven Ways to Raise Capital for Your Small Business

In the competitive world of small business ownership, the adage “you have to spend money to make money” is unambiguously true. Funding fuels success in enterprise and your capital flow is crucial in the earlier stages of business development.

Unfortunately for new startups, money is scarce. Raising funds can be a laborious, frustrating challenge for owners who are trying to seed their company’s future while perfecting a product and managing operations.

There are many effective ways to find funding, raise capital, and discover seed money sources – owners just simply need to know where to look.

Different successful business experts argue how owners should fund their startups. Some advocate for self-funded companies, others claim a line of credit from a trusted source is optimal. However, there isn’t one right answer.

The correct course of action depends on each situation — more specifically, your stage of business development.

growing money investment

1) Crowdfunding

Crowdfunding has become an immensely popular way to fund online ventures for new ideas. Indiegogo, Kickstarter, and GoFundMe are just a few of the crowdfunding platforms that have risen to prominence in recent years.

Crowdfunding presents minimal risk with millions of potential investors making small contributions that can add up over time. Well-run campaigns can net thousands of dollars – one donation or future customer at a time.

Ideal Stage of Business Development: Seeding

Crowdfunding harnesses the power of the internet to fuel innovation at the beginning of the business life-cycle. While crowd-sourcing capital can only be done at the start, it is very useful to getting a startup off the ground.

However, it is not without its drawbacks. Before even launching operations, owners can be indebted to a large number of unsophisticated investors, which can negatively impact future investment opportunities down the road.

2) Angel Investing

Angel investing is the modern practice where a business owner releases company equity in exchange for a cash infusion into the business from a single benefactor, or “angel” investor. Angel investors are typically seasoned business professionals looking for great ideas or businesses to invest in – no matter what industry they found success in.

Ideal Stage of Business Development: Expansion

Once a small business establishes consistent growth, an angel investor can take it to new heights within the business world – turning a good idea into a sustainable industry powerhouse and revenue generator for all involved. Angel investors typically put their hand in companies beyond the startup phase and are unlikely to contribute without a proven market or track record of success.

3) Strategic Partners

Small businesses are able to cut costs and improve operations by forming partnerships with other companies that will provide products or services in return for equity. Typically, partners from marketing firms, financial management groups, or relevant supply companies offer a significant discount on their goods and services for a stake in the small company.

Ideal Stage of Business Development: Startup-Growth

Strategic partnerships decrease the operational costs of a startup, allowing for accelerated growth once they have already established some success. This typically works for companies looking for long-term partnerships as well as growing businesses wanting to become an industry mainstay.

Partnerships, while mutually beneficial, cause commercial vulnerability to both parties involved. Getting involved with the wrong partner can lead to potential legal problems, reputation damage, and a wide array of long-lasting negative entanglements. Before committing to a partnership, companies should properly vet the organization or individual then draft a legally binding document, detailing the arrangement.

4) Family Money

Family can serve as a lifelong support system, and in most cases, the most logical professional advocates. However, relying on family to raise funds for a new business is a double-edged sword. While family is more likely to support an owner’s new venture, any funding comes with far greater personal risks.

If the owner were to borrow money for a business that ends in failure, it can potentially destroy an otherwise lifelong relationship. Borrower beware.

Ideal Stage of Business Development: Startup

Raising capital through family donations is much easier once a business establishes legitimacy and success. Due to the personal ties and enormous risks associated with borrowing family money, it is crucial for an new owner to be upfront about the risks and realities of the startup.

However, even if an owner shares complete transparency about the monetary risks involved, relationships can still potentially be ruined as a result of a failed enterprise.

5) Establish a Line of Credit

Using credit or a secured bank loan has been the most common form of raising capital since the dawn of commerce. When a small business is looking to expand or temporarily offset cash flow issues, it releases equity or pays interest in exchange for an immediate cash infusion.

Ideal Stage of Business Development: Growth and Establishment

Establishing a line of credit can be risky, and is typically best for businesses beyond the startup phase. If an owner were to take out a large loan for a new business venture and fail, the financial repercussions could last years.

With one-quarter of startups unable to survive past their fifth year of operation, it is crucial for businesses to ensure the line of credit is necessary to achieve a sensible goal, beneficial for long-term viability, and will be used responsibly according to a fully devised fiscal plan.

6) Peer-to-Peer Lending

Peer-to-peer lending is a crucial financial practice, rising to prominence with the advent of international stock exchanges becoming a cornerstone of today’s global economy. Most modern lending occurs electronically, with individual contributors matching with companies, usually through online services, for a small stake in their success.

Stock markets serve as the nerve center for peer-to-peer lending, providing a platform for citizens to contribute to the public, worldwide enterprise.

Ideal Stage of Business Development: Maturation

This form of investment is almost strictly reserved for companies that have established themselves as a viable long-term enterprise. Individuals want to invest in their favorite brands and reliable corporations. By taking part in public commerce, everyone can share in a proven business entity’s professional success.

7) Venture Capital

Different from other traditional financing options, venture capital (VC) is extremely competitive with firms investing in high-growth companies that are in the earlier stages of funding. According to a National Venture Capital Association’s report, out of every 100 business plans sent to a venture capital firm, 10 get a serious overview, with only 1 actually receiving funding.

Ideal Stage of Business Development: Rapid Growth and Expansion

This form of investment is controlled by an individual, small group or firm of investors known as venture capitalists. Instead of loaning money for interest payments, venture capitalists invest sums of capital in exchange for a percentage of equity and a seat on the board of directors, playing an active role in the company’s future direction.

Venture capitalist generally have years of experience and a large network of connections, allowing them to expand their invested companies, increasing both the value of the business and their own return-on-investment.

No matter the industry or external circumstances, there are some general rules for small businesses to follow to successfully raise capital.

Owners should bootstrap their cash in their startup’s infancy by delaying capital expenses, negotiating fees associated with front-end costs, and hiring interns or high-quality freelancers if appropriate. Generally, it’s a good idea to avoid giving up equity in your startup unless necessary and infuse the business with at least some of your personal money for investment.

However, the main driving factor behind raising capital successfully and strategically is in the company’s business development stage, which will primarily determine the ideal source of funding for long-term growth. Let your operational life-cycle drive your strategy for greater success and efficient use of resources.

Learn More

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Sources

http://nvca.org/research/stats-studies/

https://www.sba.gov/starting-business/finance-your-business/venture-capital/venture-capital

http://www.inc.com/dave-kerpen/5-clever-ways-to-raise-money-for-your-startup-without-making-an-investor-pitch.html

http://time.com/money/3895840/small-business-funding-creative-startups/

https://www.entrepreneur.com/article/52742