Creating your own start-up comes with a lot of challenges. One of the biggest problems will be raising enough capital to fund your new business venture. It might seem intimidating at first. After all, if you don’t raise the money, how can you possibly make your dream into reality?
Luckily, there are many ways you can go about raising capital for your business. In this article specifically, we will show you the six most common methods of fundraising for small businesses.
Steps to Follow Before Looking for Funding
Before you look into raising capital for your start-up, think of a solid business plan. What is your purpose in business? What is your strategy for success? What is the current situation regarding your market? It is important that you know how to answer these questions.
A well thought-out business plan will not only help you win over potential investors. It will help determine how much capital you require and the timing of your funding. Do you need money right away? Or can you receive money in multiple installments?
The amount of funding you need will build upon the specifics of your personal start-up. Depending on how much money you need, some fundraising options will be better suited for your aim than others.
6 Easy Funding Sources
To fundraise your business, there are some methods suited for your new business. For example, consider whether you want to part with some of your equity? How much outside input will you accept from outside sources?
Regardless of the size of your future business, planning things out ahead will help you to understand how much money you need and when.
When trying to raise capital, you don’t have to settle for one singular option either. In fact, it is often beneficial to acquire multiple sources of funding. So there are some basic steps to follow:
1. Personal Savings
By far the most common financing method for small business is the investment of personal funds by the founder. The two main concerns for this method are easily apparent. Not only does it depend on how much personal savings you have, but it also comes at the risk of losing everything you invest.
Because of the risk involved, this method of fundraising might seem very unattractive at first. However, you should also consider its potential.
If you truly believe in your vision and create a well thought-out plan for your start-up, feel confident enough to invest some of your personal funds into it. This personal investment into your business might also inspire confidence in future investors. They might be more willing to partner up with you based on your initial commitment.
2. Friends & Family
Another viable option for raising capital for your business is to ask your friends and family for money. They can provide funding either as a loan or through buying shares in your company. You can also pay them in royalties, whereby they will get paid a set percentage of your sales.
It is usually easier to convince your friends and family of your new business venture than it is convincing strangers.
Explain your start-up idea to your friends and family and show them your business plan. Make sure they’re well-aware of the risk they’re taking by investing into this venture. Talk about expectations and be realistic. Consider how the investment might influence your relationship and whether you would take responsibility in case your business fails.
One of the most traditional methods of fundraising is to apply for a loan. Credit unions and banks will lend you money, which you will have to pay back over time with interest. There are different types of loans and interest rates can vary, so it’s important to do some research and compare the different offers available to you.
While you will have to pay the money back with interest, a loan will not require you to give up equity. This might make a loan a more appealing option of fundraising. It can be quite hard to secure a loan, especially when you are just starting out.
You will have to convince the lender that you will most likely be able to repay them. Sometimes, this includes meeting certain requirements. For example, they might ask you to put up collateral.
Before applying for a loan, prepare any loan documents you might be required to show ahead of time. This includes a statement of your profits and losses, balance sheets, tax returns and bank statements.
4. Angel Investors
The term ‘angel investor’ describes a wealthy, private investor who offers financial support to emerging businesses. These investors typically act independently, but sometimes they form organizations, known as an ‘angel group’, to collectively help fund start-ups.
Often, angel investors are entrepreneurs themselves. They understand the struggle and hardship that comes with building a business from the ground up.
However, you should not forget that many angel investors are looking to get a solid return on their investment. While they might share some of your goals and ideals, you still have to convince them that your business will be worth their time. If you feel unsure about how to present to investors, you can check out our guide here.
Look into angel groups based in your area. Be aware that many other businesses will try to secure funding from the group. The competition is fierce, and the groups can be highly selective. Because of this, it’s often better to work on your networking. Find an individual angel investor, and try to convince them of your start-up.
5. Venture Capital
This type of funding is usually limited to businesses that are already past the initial startup period. Venture capitalists typically want to invest into scalable and already profitable companies. They are usually looking for a return on their investments within a few years.
When selecting a business to fund, venture capitalists go through a lengthy verification process. Because of this, the application process and approval can span months.
They usually want to be very involved with the businesses they fund. They often take a large equity stake and want to play a significant role in the management of your company.
Regardless, their funding might just be what you need to take your start-up to the next stage, and their insights can prove invaluable when trying to scale your business.
Launching a crowdfunding campaign can prove very helpful. It can allow you to connect with other people and engage with potential future customers. A crowdfunding campaign can be great for measuring interest for your business or product, and it might help you understand what aspects of it resonate with people, and which parts still might need improvements.
It is, of course, also great for raising capital for your start-up.
Traditionally, crowdfunding campaigns are done through specific crowdfunding platforms over the internet. After explaining what your venture entails, individuals donate to your cause. It is common practice to offer ‘gifts’ in exchange, depending on the level of investment. For example, those gifts can be a free product or memorabilia specific to your company.
This type of funding will require some basic marketing to succeed. In order to spread the word about your campaign, an extensive network of friends and acquaintances can be very helpful.
While capital raised through crowdfunding will usually not come with the obligation of repayment or equity disbursement, it is not without drawbacks. It’s hard to stand out among all the different campaigns. Sometimes, you need to set a specific crowdfunding goal. Some crowdfunding platforms will not pay out any money unless you reach your campaign goal.
Raising capital for your business is essential. Whether you’re looking for an initial investment to start your business, or some extra cash to scale and expand, there are many ways to secure funding.
A well-thought out business plan and a good grasp on what you need will help you to raise the capital you require.