Is your startup seeking paths for funding? If so, you’re not alone. According to research by the Small Business Administration, small businesses borrowed up to $645 billion in 2020.
Finding the best way to raise capital for your startup is a challenging and painstaking journey. To make it easier for you, we’ve listed all the different ways to finance your startup:
How to Raise Capital: Equity or Debt?
When it comes to raising capital, you can choose between two main ways:
Equity financing refers to the act of selling shares of your company’s stock to raise capital. These stocks may be common shares or preferred shares.
Preferred shares are paid to shareholders before common stocks are paid, and common shares are a form of corporate equity ownership, giving shareholders voting rights.
Equity financing can come from a number of different sources, usually Angel investors, private investors, and Venture Capital firms.
Otherwise known as debt raising, debt financing is borrowing money and promising to pay it back later. It typically occurs through a loan.
On the contrary, businesses may sell corporate bonds to investors. Until the bonds mature, the company is required to pay interest fees to the investor.
Why Raise Capital for Your Startup?
Here’s why you should consider raising capital for your startup:
- When you use small loans or bootstrapped money (personal finances), launching may take a couple of years. Besides this, venture capital offers larger cash infusion upfront. It allows you to upscale to a visible operation and hire the talent necessary to run your business within a couple of months.
- While some people believe requesting funding is a sign of weakness, the fact is that it’s the opposite. Suppose a venture capitalist or angel investor is willing to fund you a surplus amount of cash. In that case, it shows that they believe your startup has the potential to succeed and offers value to its target audience. This display of approval helps build credibility with prospective stakeholders and clients.
- When raising capital for your startup, you can tap into resources beyond cash. You’ll also get to enjoy extensive resources, mentorship opportunities, business expertise, connections, and growth in your network. Entrepreneurs with limited experience can find it challenging to reach these resources.
- Another benefit of connecting with experienced venture capitalists is understanding risk, making tough decisions, and strategy. You’ll find that most investors are more than happy to provide advice and offer hands-on guidance.
The Top Ways to Raise Capital for Your Startup
Here we’ve created a comprehensive list of ways to raise capital:
Bootstrap Your Business
Self-funding, otherwise referred to as bootstrapping, is an excellent way to finance your startup, especially when you’re just establishing the business. If your business doesn’t belong to an industry that requires extensive capital, such as transportation, you should consider funding your own venture.
For instance, even if you lack substantial savings to run your business, you could potentially get a low-interest APR business credit card. This way, you can borrow cash for some time without incurring any interest.
While it’s true that funding yourself comes with several risks, you must consider your potential. As long as you believe in your vision and refuse to accept failure, you should feel confident investing your own money, and it will keep you even more motivated towards success.
Seek a Crowdfunding Campaign
Crowdfunding is another popular way to get an investment for your startup. There are numerous crowdfunding success stories, and with the right pitch and product, you can become one of them.
Crowdfunding operates by requesting an entrepreneur to add a comprehensive description of their business to a crowdfunding website. Here you’ll have to mention your business goals, plans for making a profit, how much funds you need, why you need the funds, and so on. Viewers can read about your business and donate capital if they like your idea.
Crowdfunding offers an opportunity to connect with like-minded people. You can gauge interest in your service/product, as well as determine what’s resonating with your target audience. Ultimately, this can help improve your pitch and product. On top of that, crowdfunding helps you raise substantial capital to fund your startup.
The downside of crowdfunding is that you usually must reach a pre-determined financial goal. If you do not meet it within a certain timeframe all the capital is returned to the contributors. Additionally, failed projects can damage your business reputation.
Apply for a Loan
Traditional investment methods remain one of the top ways startups fund their business. Small Business Administration research concludes that up to 75% of financing for new organizations are sourced from credit cards, business loans, and lines of credit.
Typically, small business loans boasting favorable rates and terms will be term loans and SBA loans from banks or financial institutions. To get approved, you’ll need to meet the following requirements:
- Be in business for up to 2 years or more
- Have consistent annual revenue of up to $100,000
- Good credit such as a score exceeding 640
When applying for an SBA loan, ensure you prepare all your documents beforehand.
Find an Angel Investor for Your Startup
Angel investors have substantial cash and are eager to invest in new businesses. They may even work in groups of networks to screen your proposal before agreeing to invest.
Another benefit of finding angel investors for your startup is the added value they offering, mainly expertise, connections, and mentoring, in addition to funding.
Angel investments typically occur during a startup’s early growth stages.
Consider Venture Capital for Your Business
Venture capital refers to a form of private equity and financing that investors provide startups and small businesses they believe have long-term potential. It typically comes from investment banks, affluent investors, or other successful financial institutions.
You can even access other resources, like managerial expertise, technical help, professional marketing, and many other services that can greatly contribute to your startup’s success.
However, keep in mind that venture capitalists usually look for companies working at a larger scale and already generating revenues of some sort. They’ll want to see a return on their investment within three to five years.
Raise Capital by Asking Family and Friends
Another excellent way to get funding for your startup is through family members and friends. An in-depth survey by the Kauffman Foundation reveals that 40% of startup funding comes from family, friends, and business acquaintances.
Before talking to friends or family members, consider narrowing down your list to people who understand your plans and mission and know the risks.
Asking your family member or friends for capital comes with certain benefits, including:
- Flexibility – friends and family members are more likely to offer loans with less security
- Friends and family members provide interest-free or low-rate funds
- They may offer a longer repayment period
- They’re less likely to ask for a detailed business plan
Find Funds from Business Incubators and Accelerators
Business Incubators and Accelerators are an excellent funding option for businesses struggling in the early stages of development. Easily accessible in most major cities, these programs are well-known to assist countless startups each year.
Often interchangeably used, these two terms are different with striking distinction in functionality and financial assistance.
Business Incubators are more likely to parent your business; they’ll nurture your startup by providing shelter, tools, and training. An incubator will develop disruptive business ideas with the goal of building out the ideal business model.
Business Accelerators can help your business take a giant leap. They help accelerate your startup’s growth. Accelerator programs typically have a well-defined timeframe in which individual businesses spend between from a couple weeks to a few months working alongside a group of mentors.
These programs allow the opportunity to create a robust network with investors, mentors, and other fellow startups to collaborate with.
Raise Funds by Winning Contests
An increase in pitch competition and contests has helped startups maximize opportunities for raising capital. It offers entrepreneurs with killer business ideas the perfect chance to launch their own businesses.
In these competitions, businesses either have to prepare a detailed business plan or build a high-quality product. Winning such a competition can also provide you with media coverage.
Get a Loan from Microfinance Providers or NBFCs
Microfinance offers capital to smaller startups and businesses that can’t access conventional banking loans.
People with low credit ratings rely on microfinance as the perfect respite when conventional banks won’t agree to give loans.
Non-Banking Financial Corporation’s (NBFCs) offer loans to entrepreneurs looking to start a small-scale business.
What Are Some Quick Ways to Raise Money for Your Business?
Here are some quick ways to raise money for your business. Remember, these might not work for every startup but are worth testing out:
An overlooked yet highly effective way of raising capital is to sell your product before you launch it.
For instance, Apple and Samsung often start pre-orders of upcoming launches. It is ideal for boosting cash flow, as well as prepare yourself for your consumers’ demands.
Selling your personal assets may sound like a tricky step, but it’s an excellent way to meet your short-term capital requirements. Consider tapping into your savings, selling valuables, or downsizing into a smaller house.
Once you combat the crisis, you can raise enough money to buy back your assets.
Credit cards are a fairly convenient way to finance a startup. If you’re a small business and lack surplus expenses, you can use a credit card while paying the minimum payment.
Keep in mind that costs and interest rates can start building fast. Plus, carrying such debt may be detrimental to your business credit card, as well as the overall business.
The 4 Steps to Completing Your Funding Process
When it comes to fundraising, your goal should be to make the process effective and efficient.
Here, we discuss the four steps to achieving this:
Do the Math
Before you start fundraising, it’s important to know the numbers.
You need to determine the following:
- Capital Structure – Reveals who you owe, as well as what you owe in terms of equity and debt
- Capitalization Table – Helps you determine how equity in your company has been allocated
- Cash Burn Rate – The amount you spend per month to manage and operate your business
Figure Out What You Want
Once you do the math and determine your cash burn rate, capital structure, and cap table, it’s time to set your startup funding goals.
Sit down with a pencil and a notebook and ask yourself:
- What do you want to do apart from growing your business?
- How long will it potentially take you to achieve those things?
- How much capital do you require to ensure operations are running smoothly during that time?
Once you figure out your goals, set a time frame of 12 to 18 months and complete them. You’ll also have to calculate the amount of money required to achieve these goals.
Target the Right Investors
Next, it’s time to target the right investors. Here are a couple of questions you should answer beforehand:
- What type of investor do you want onboard?
- What are the qualities of a perfect investor?
- What should the right investor bring to your startup? Market expertise, customer insights, connections?
- What weak links do you want the investor to strengthen?
Apart from all of that, make sure you go after smart money. After figuring out the qualities you’re seeking, you need to commence your search for the right investor.
Prepare a Funding Roadmap and Stick to It
Now it’s time to create a killer strategic roadmap that you’ll present to your selected investors. Once you begin the process, it will become an important activity for as long as it takes you to raise capital.
Make sure you create schedules and benchmarks to ensure you’re walking down the right path. Select one team member to take care of the fundraising campaign while the rest focus on fortifying the business.
The Bottom Line
All in all, when it comes to raising capital for your startup, you’ll find that there are an array of options. Don’t feel discouraged if one doesn’t work out, as you can always polish your idea further before moving onto another funding option.
With a well-defined company structure, business model, and marketing strategies, conduct in-depth research, demonstrate persistence, and you can raise the capital necessary to launch your startup.