Whether you run a startup or a Fortune 500 company, you need capital to grow. Here are six strategies for raising capital as a small business owner.
Raising capital to start your business or help it grow can be an intimidating feat, but there are several different paths you can follow to find the funds you need. Here are six strategies you can explore to raise capital for your company.
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Strategies for raising capital
Whether your company is a fledgling startup or a Fortune 500 rock star with impressive cash flow, access to capital is key to building a strong business. Thankfully, various funding solutions are available to help companies raise capital and take full advantage of market opportunities.
One of the hottest solutions for raising capital is crowdfunding. It's exciting and incredibly public. You can create a profile quickly, record a video pitch, spread the word to your friends and family, and hope they help it spread it around the globe.
To be successful, you'll need to:
- Have a hot product or service to offer in return for funding.
- Work with someone who's amazing at creating compelling video.
- Go crazy with online marketing to draw potential supporters to your profile.
Remember, with crowdfunding, you're giving away a product or service, not equity. If you hit your goal, it's your responsibility to deliver the exceptional products you promised in your campaign. [Read related article: What Is Crowdfunding?]
To get a feel for how to create a killer pitch, check out these insanely successful crowdfunding pitches:
- MATE X eBike raised more than $17.5 million on Indiegogo.
- Pebble Time raised more than $20.3 million on Kickstarter.
2. Venture capital firms
Venture capital is a form of equity financing, which involves raising capital through selling shares. Like the sharks on NBC's Shark Tank, venture capital firms provide funding in return for equity in an idea or concept. [Read related article: Private Equity vs. Venture Capital: What's the Difference?]
To successfully raise money with a VC firm, you'll need to:
- Create a killer business plan, packed with market research and a strong financial forecast.
- Tap into your network to get past the gatekeepers and earn the opportunity to pitch to the VC's investment board.
- Craft the perfect pitch that comprehensively explains the opportunity, and prepare to answer some serious questions from the board afterward.
You should go into the meeting with a VC firm expecting to look foolish by the end. No matter how much research you do, there will be someone on the other end of the table who will be smarter than you, or at least have more experience in your field. That's exactly why you should pitch to the VC firms.
Pitching will force you to improve your skills and hammer out your idea. You'll absolutely learn something new, and you'll likely learn about some weaknesses in your concept or idea that will help you build a stronger business in the years ahead.
3. Banks and credit unions
Getting a small business loan through a bank or credit union is a more traditional way to secure funding. Various investment options are available from leading U.S. and European banks:
- Business credit cards
- Business lines of credit
- Traditional personal loans
- Mortgage refinancing
These financial resources are great for people with solid credit history. It's important to understand what you're getting into, though, as it's easy for a fledgling business to get in over its head in debt and end up in a financial nightmare. Debt capital is a risky way to fund a new business.
Traditional lenders won't be interested in learning about your struggles or better understanding your market opportunity if you miss a payment. They will act quickly to collect on a defaulted debt if you fail to honor the repayment terms. [Read related article: How to Get Your Business Loan Application Approved]
4. International financial solutions
Different countries have widely varying laws and regulations in place to help startups grow and access capital. Thankfully, there are firms available across the globe to provide financial advice. Working with a local partner is a great idea, as they'll have access to tools and information that will make the process of gaining financial assistance significantly easier.
5. Online loans
One of the easiest, fastest solutions for accessing capital is an online personal loan. There are virtually endless opportunities online, with lenders from all over the world competing to lend you money. [Read related article: Best Practices to Follow Before Applying for a Small Business Loan]
Thinking about applying for a loan online? Here are a few tips to help you do it safely:
- Verify that the website processing your application uses Secure Sockets Layer (SSL) encryption. The address bar in your browser should inform you of the presence of this extra layer of security.
- Read the fine print at the bottom of the webpage. Many of these websites are not run by lenders, but by third parties pretending to be lenders. In reality, the information you provide is shopped around to hundreds of lenders, who will then fill your inbox with solicitations.
- Before agreeing to submit an application online, always do your due diligence and research the lender. It's easy to be fooled by a sharp-looking website into letting your personal information fall into the wrong hands.
6. Angel investors
Another option for equity financing, angel investors are individuals who invest in a new business by providing startup capital in exchange for ownership equity in the company. Angel investors are often family members or loved ones, but they can be anyone who sees value in a startup company. These investments can be one-time payments in the form of seed capital or ongoing financial support for a small business, allowing the investing individual to become a shareholder.
Tips to prepare your business for fundraising
No matter which form of financing you pursue, here are four things you can do to prepare your business for raising capital:
1. Improve your personal credit score.
This step is especially important if you're a new entrepreneur, as you'll have no other proof of how you handle your financial obligations. If your personal credit score is low, investors likely won't trust you enough to fund your business idea.
To build credit and raise your score, ensure you're doing the following:
- Pay your bills on time.
- Keep your balance low.
- Pay off debt.
- Use credit to cover rent, utilities or other monthly payments.
- Make frequent payments (that you can afford).
- Ask for higher credit limits.
- Keep credit cards open.
To really wow potential investors, aim for a score of 740 or higher. Of course, this is better than average, but it's a great goal to work toward if you want to secure funding as a business owner. [Read related article: When Does Your Business Credit Score Matter?]
2. Create a business plan.
Without a solid business plan, investors won't feel confident providing equity capital to your business. It's important to create a business plan that outlines who you are, your goals and how you might achieve them.
In the case of attracting equity financing, you'll want to heavily focus on your financial projections to prove your business is worth the investment. In addition to detailing your cash flow, here are some examples of what to include in your plan:
- Projected profit and loss statement
- 12-month income statement
- Sales forecast
- Expenses budget
- Projected balance sheet
- Break-even analysis
- Balance sheet for at least three fiscal years
3. Perfect your pitch.
When it's time to ask investors for money or seek a business loan from your bank's lending officer, you'll want to deliver a strong pitch to capture their interest. This pitch shouldn't just tell the story of your business, but the details of the investment and how it will benefit potential investors. Explain what they will get from the deal and how their involvement will reward them in the end. Focus on what your business can do for them rather than what they can do for your business.
Also prepare a term sheet, which outlines the terms and conditions of the prospective agreement between you and your lender or shareholder, so everyone is on the same page.
4. Evaluate funding options.
You don't want to settle for the first investor interested in your company. Every source of funding has pros and cons that you'll want to familiarize yourself with so you aren't caught off guard. Do your research and consider the above options to determine which type of financing is best for your business.
Sammi Caramela contributed to the writing and reporting in this article.