If you’re looking for ways to raise capital for your new business, you’re not alone. According to a 2020 report by the Small Business Administration (SBA), small businesses borrowed $645 billion. That’s more than the GDP of Sweden!
More than half of all the businesses in the study who applied took loans of $100,000 or less. That adds up to a lot of small business owners looking for funding.
While money doesn’t grow on trees, there are a number of ways you can seek funding for your business—some more traditional than others.
How to Raise Funds for Your Business
Here are six ways you can raise the money you need to expand your business.
1. Bootstrap your business
Provided that your business isn’t operating in an industry that requires lots of startup capital, like manufacturing or transportation, you can potentially fund your own venture—and it may be more feasible than you think.
For instance, even if you don’t have enough in savings to run the operation, you could get a 0% / low interest APR business credit card, offering you the chance to borrow cash for a period of time without incurring interest.
Perhaps you think funding the business yourself carries lots of risk—and it does. But it’s important to consider your potential.
Brent Gleeson, a leadership and team building coach specializing in organizational transformations, states, “if you believe in your vision and have an absolute refusal to accept failure as an option, you should feel comfortable investing your own money into the business.”
Investing some of your own money will usually make investors and lenders more willing to partner with you down the line.
2. Launch a crowdfunding campaign
There are many crowdfunding success stories out there. And with the right product and pitch, you can be one of them.
For instance, in 2013, Formlabs, a maker of affordable desktop 3D printers, raised $3 million on Kickstarter. This capital allowed the company to scale their operation and achieve their goal of manufacturing affordable 3D printers for the public.
Eventually, the 3D printer maker caught the attention of venture capitalists. During a series A round, Formlabs closed $19 million in investments, giving them the chance to expand beyond their initial goals.
Crowdfunding gives you the opportunity to connect with like-minded people who you wouldn’t normally be able to engage. You can gauge interest in your product and understand what’s resonating with people and what’s not. This shows you how to improve your product and your pitch. Most importantly, crowdfunding can help you raise money to fund your business.
So, how do you launch a successful crowdfunding campaign to raise capital for your business?
Nathan Resnick, a serial entrepreneur who’s had success raising money on crowdfunding sites, stresses that you must develop your story, as “people on crowdfunding sites like Kickstarter or Indiegogo want to know how you turned your idea into a reality.”
Your video pitch must show the value of your product, the need it serves, and why you require support. Having a good website and doing PR outreach helps as well.
3. Apply for a loan
Even as technology creates new ways of raising capital, traditional financing products remain the primary way small businesses fund their operations. According to the Small Business Administration (SBA), almost 75% of financing for new firms comes from business loans, credit cards, and lines of credit.
Generally speaking, the small business loans with the most favorable rates and terms are going to be SBA loans and term loans from banks and other financial institutions. To get approved, you typically need to meet requirements like the following:
- You have been in business for 2 years or more
- The business has strong annual revenues (typically at least $100,000)
- Good credit (like a score of 640+)
These aren’t hard and fast rules and will differ depending on the lender. If you don’t qualify for a term loan with a good APR, there are other, albeit more expensive, types of funding available.
If you have outstanding invoices, you could opt for invoice financing to get that money faster. Or, if you need cash for machinery, tech devices, office furniture, or something similar, consider equipment financing.
Before applying for a small business loan, make sure to prepare any loan documents you’ll need to show ahead of time. You’ll be asked to show a profit and loss statement, balance sheets, tax returns and bank statements. In some cases your personal information may be checked as well.
4. Raise capital by asking friends and family
Raising capital for a business through friends and family is a viable option for many. According to the Global Entrepreneurship Monitor, 5% of US adults have invested in a company started by someone they know.
Caron Beesley, a content marketing specialist and SBA contributor, advises that you ideally select a friend or family member with solid business skills. She also suggests that you “narrow your list down to friends or family who have faith that you will succeed, who understand your plans, and who are clear about the risks.”
Once you’ve done that, Beesley stresses that you must demonstrate passion and due diligence by having a sound business plan and direction. Also, be realistic about how much money is needed.
Finally, make sure to agree on what form the funding will take. They could be a loan or equity in your company. If the money is a loan, agree to a repayment plan and use a P2P lending website to document everything and manage the loan.
5. Find an angel investor to raise capital for a business
By definition, angel investors are accredited individuals with a net worth exceeding $1 million or annual income of more than $200,000. They typically operate alone, but may team up with other angel investors and form a fund.
Knowing this, angel investors can be a good source of capital for your business. First, you must have a solid business plan put together and a great pitch ready. You have to capture their attention with enthusiasm and promising data points about your company’s current situation and future potential.
You may be wondering how you find angel investors. This might seem difficult, but many resources exist.
6. Get investment from venture capitalists
Venture capitalists (VCs) typically want to invest in slightly more mature companies than angel investors and sometimes want to have more of a say in managing the day-to-day operations.
Since VCs have a responsibility to achieve certain returns for the firm or fund, they want scalable and cash-flow positive companies with proven and scalable products and businesses.
If your company satisfies these requirements, you could apply for an investment with a VC firm. It’s not the easiest thing to accomplish, but plenty of small businesses have done it successfully.
Your pitch is crucial to obtaining funding. Sequoia, one of the most successful VC firms on the planet, stresses, “you need to convey the main reasons why an investor should love your business in the first 5 minutes.” Sequoia partners state you can do this in three simple steps, which are:
- Explain what’s changed. Detail the innovation, industry shift, or problem that presents substantial opportunity for your company.
- Explain what you do. In one sentence, show how your company can capitalize on this opportunity.
- Explain the facts. Get to your company’s story and financials quickly. Lay out the opportunity with numbers. Discuss the team and their abilities and experience.
Frequently Asked Questions
Can you explain the difference between debt financing and equity financing?
Two main ways a business can raise capital are debt or equity financing. Debt financing involves borrowing money from a lender or financial institution. It is then paid back over a set period. It also allows the owner to maintain full control of the business.
Equity financing involves selling a portion of the business’s ownership to investors in exchange for capital. These investors become shareholders and may have a say in the company’s decisions and profits. Unlike debt financing, there is no fixed repayment schedule for equity financing.
What are some common mistakes to avoid when raising capital for a business?
One common mistake is inadequate preparation and research, which manifests in a poor understanding of the market and competition. Overly optimistic business valuations, often lacking concrete data support, can deter savvy investors. Entrepreneurs sometimes underestimate the importance of a compelling business narrative, failing to communicate their vision effectively.
Next, ignoring potential investors’ needs and concerns is another blunder, as tailoring your pitch to their interests is essential. In terms of financial management, not having a clear plan for the funds or demonstrating poor money management skills can be detrimental.
Lastly, insufficient knowledge about legal and regulatory requirements can lead to serious consequences.
How important is having a solid business plan when trying to raise capital?
A solid business plan is vital when raising capital. It is a roadmap detailing the company’s vision, goals, target market, competition, financial projections, and operational plan. Investors evaluate these elements to determine the venture’s viability and growth potential. A robust business plan demonstrates strategic thinking, risk management, and financial savvy, enhancing investor confidence.
The lack of a well-formulated plan can lead to skepticism about the entrepreneur’s preparedness and the business’s sustainability. This is why a comprehensive, clear, and compelling business plan is crucial in convincing investors that the business is worth their investment, significantly influencing the capital raising success.
Are there any government grants or programs available for small business owners to raise capital?
Various government grants and programs are available to support small businesses financially. These may vary by country and region but often include start-up grants, innovation grants, and research and development funding. In the U.S., the Small Business Administration (SBA) offers numerous loan programs, while the SBIR and STTR programs provide funds for technological innovation.
The European Investment Fund offers support in the EU, and in Australia, the government provides grants through the Australian Small Business Advisory Services program. These initiatives can offer crucial financial support, but businesses must research and identify those most applicable to their needs and eligibility criteria.
How can networking and building relationships help with raising capital for a business?
Networking and building relationships are key to raising capital for a business. They provide opportunities to connect with potential investors, industry leaders, and other entrepreneurs who can offer advice, partnerships, or funding.
Engaging with diverse networks can lead to introductions to angel investors, venture capitalists, or other sources of capital. Moreover, these connections often result in valuable feedback to refine business plans or pitches.
Established relationships based on trust and mutual respect can also enhance investor confidence, facilitating more favorable investment terms. Thus, effective networking is about increasing visibility and forging strategic alliances that can significantly impact capital-raising success.
How do I determine the best financing option for my specific business needs?
Determining the best financing option for your business needs involves carefully evaluating several factors. Firstly, clearly define your funding needs: is it for startup costs, expansion, or managing cash flow?
Next, assess your business’s financial health, creditworthiness, and risk tolerance. Different financing options, such as loans, equity financing, crowdfunding, or government grants, have varied costs, obligations, and implications.
Consider the pros and cons of each, such as interest rates, repayment terms, equity dilution, and control over business decisions. Also, consider your industry, stage of business, and growth potential, as certain options may suit specific scenarios better. Consulting with financial advisors or mentors can provide valuable insights into making an informed decision.
Get the capital you need to drive forward
The key lesson here is that you have many options for financing your business. Don’t get discouraged if one doesn’t work out. By demonstrating due diligence and being resourceful and persistent, you can raise the capital you need.
Then, money will no longer hold back your business. You’ll be free to expand.
Meredith Wood is the Editor-in-Chief at Fundera, an online marketplace for small business loans that matches business owners with the best funding providers for their business. Prior to Fundera, Meredith was the CCO at Funding Gates. Meredith is a resident Finance Advisor on American Express OPEN Forum and an avid business writer. Her advice consistently appears on such sites as Yahoo!, Fox Business, Amex OPEN, AllBusiness, and many more.