How to Raise Capital for Your BusinessSecuring funding for your business venture doesn’t have to be hard. Here are the best ways to raise capital. September 5, 2018
Being an entrepreneur isn’t an occupation, it’s a mindset, a lifestyle. The inspiration for doing what you love will push you forward. But plain enthusiasm won’t do the trick. You need money to fulfil your ideas.
Raising capital is a step every startup faces. How do you get money if your business is brand new? Sure, bank loans are an option, but are they the best choice?
There are a lot of misconceptions surrounding capital raising. And as a business owner, you need to be familiar with the different options you have. So let’s start with the basics.
Table of Contents
- What is capital?
- What does it mean to raise capital?
- How corporations raise capital?
- How startups raise capital?
- Tips on raising capital
- Where to look for capital for your business venture
- The benefits of investing your money in a franchise
What is capital?
Most people understand capital as the initial amount of money a business has. While it’s partially true, that’s not capital – that’s money.
The term ‘capital’ refers to any type of asset a business has and owns. It can be in any form – money, bonds, shares, investments in other ventures, even machines that produce the product.
Capital is mostly used for (or as) an investment that’s going to generate money in the long term (think three years and more).
There are four main types of capital – debt capital, working capital, trading capital and equity capital. Each serves its purpose, and as an entrepreneur, it’s good to understand the basics of them.
Debt capital is the capital acquired by taking out a loan. This type of capital is repaid on a later date with interest. It can be acquired by taking a bank loan, friends and family lending you money, or any other type of money taking that have to be returned.
Working capital is the best way to understand the financial health of a company. Simply put, working capital is the short-term liquidity of a business. It’s used to cover debts, payable accounts and any other obligations due within a year.
Trading capital is used by a business to trade and invest, as you might have already guessed. Many big companies use the trading capital to invest in other businesses, buy shares and grow the company’s personal wealth.
Equity capital is acquired through outside investments. They don’t have to be repaid on a later date. Equity capital can be derived through the investment of personal funds by the business owners or selling of stock. Or, when angel investors and venture capitalists pay for an equity in the company.
What does it mean to raise capital?
Now that you know the basics of capital and how capital has to work (btw, these are bare basics of capital), let’s see what it means to raise capital.
The act of raising capital can be done by both startups and already well-established businesses. Capital is supposed to be used as funding to manufacture a product, grow a business, place the business on new markets, and really any other acts that will improve the current position of the business.
Capital can be raised in many different ways. Depending on your business, you may have to pitch your business ideas to venture capitalists, banks, friends, angel investors and even raise capital from your current or potential customers.
How corporations raise capital?
Large corporations raise capital in ways completely different from small businesses. Not only that they have the financial power to take their time and find the best investors, corporations have the experience in raising capital (or at least can hire people that do).
Most commonly, big businesses raise capital through sales of common stock, dividends, issuing preferred stocks or even borrowing money from banks.
Unlike small startups, established companies have the history and stability to take out big loans. Often, such businesses have well-established relationships with banks.
How startups raise capital?
Unlike corporations, small businesses and startups have to search for capital in more unconventional ways.
Such entities lack history with banks and don’t have the size to issue valuable bonds or trade stocks.
Instead, startups and small businesses seek outside usually independent investments from friends, family, angel investors and crowdfunding. Each investor has its pro’s and con’s and it’s best to know the terms that you should be looking for and what you’re seeking.
Tips on raising capital
While raising capital sounds simple when it’s written, the whole ordeal requires strategic planning, time, knowing the right people (or access to people that can share the word in the business world) and speaking with professionals in the world of capital raising.
Prepare a POA
A power of attorney is a document that allows someone to take decision and action with your investments,
POA is a big step, especially when you trust someone with all of your funds. Usually, a POA has to be in the paper, signed and witnessed. It’s always best to take your time and research before signing a POA.
A power of attorney document is essential if you want someone to manage your finances if you were to unexpectedly be unable to control them yourself.
Know the minimum amount of investment needed
You can’t seek capital and not know how much exactly you need. Before you start looking for investors know how much of an investment you need, and what you’re giving in return.
Know how you’ll use this investment and have a clear plan written. Make sure you give specific attention to how the investors will benefit from this investment.
Prepare a solid business plan
Your business plan is an essential part of your pitch to the investors. You may not use it in the pitch itself, but a business plan will serve as a secondary persuasive point for the investors.
The proper business plan can secure a funding from investors that would’ve otherwise passed you. Having a strong plan in place shows investors that you’re serious about developing your business, have a good understanding of the market and the niche that your company operates in and that you’re a professional that deserve their attention.
Get your financials sorted
In order to make someone put their money and trust in your company, you’ll have to prove that you’re a serious businessman.
Hiring an accountant is decremental to securing an investor. No one would trust a business that doesn’t have a clear understanding of the finances in their business.
Speak to advisers
There are people that know how to deal with investments. It’s always best to speak to financial and investment advisers before you start searching for your next investors.
When you’re inexperienced it’s easy to get something wrong. You can even get scammed, or put your business and yourself in quite an uncomfortable situation.
Advisers are there to ensure that you secure the best investment deal as possible, according to your business needs.
Where to look for capital for your business venture
While there may be many ways to secure capital for your business, all of them can be summed up into 9 main investor streams. Depending on your business and niche, a different type of investors will be suitable for you.
If you’re just starting out, you have to consider yourself as the first investor. Why would anyone put their money into your venture if you wouldn’t do it?
Using your money shows investors that you’re serious about growing your business. Investing in your business is like an assurance for outside investors.
Friends and family
While many entrepreneurs stay away from seeking financial investments from their friends and family, there is a great chance to secure money from them.
Truth is, you may have family members or friends that are looking for a place to invest their money. Just treat them as any other investor and everything will be fine.
As a new startup, an angel investor may be your best bet. Business angels usually invest their money in exchange for a small ownership part of the business.
More and more successful entrepreneurs are giving back to the community by investing their money in new companies.
As angel investment is high risk – high return, most informal funders require a high return of investment. Somewhere around five to ten times the amount of the initial investment in the next five years.
As most businesses fail in the starting stages, angel investors rarely put their money into businesses without a clear exit strategy. This exit strategy would include acquisition plans or initial public offering.
Venture capitalists are wealthy investors that support small businesses and startups by giving them capital to grow and expand.
These individuals invest in such businesses for huge returns. Venture capitalists aren’t always keen to put their money into highly innovative companies with no sure future in front of them.
However, this is individual for each person, so it depends on the investor.
Among the hardest to persuade, private investors are a great opportunity if you feel like you have an already established business, and you just need money to grow, then definitely pitch your idea to private investors.
As an entrepreneur, it’s just a matter of time before you need the help from banks. Taking a bank loan has its pros, however, when it comes to starting your business with loaned bank money, we suggest you skip it.
Getting a bank loan is hard, especially if you don’t have a great credit score, and most young people don’t.
But if you decide that a bank loan is going to be the way to fund your business venture, make sure you have a rock-solid business plan. Banks use your business plan as an evaluation of sorts – how you foresee the future of your company, how you plan to make money, etc.
All banks would want collateral, especially for larger loans.
Depending on the product or service that your business provides, you can offer pre-ordering of your product.
Pre-ordering provides you with the funding to produce the product or service, cover shipping and usually you can turn a nice profit. However, depending on the industry you operate you may not be able to pull this off.
Non-government organisations rarely invest money into startups. However, these organizations often have the connections needed for you to raise capital.
Pitching your business to NGO’s can often lead to you meeting the right individuals that are interested in investing money into your company.
Crowdfunding has been booming for the past decade. This type of capital raising has given us some pretty successful brands, among which is MVMT Watches – a million dollar brand that at one point became the world’s fastest-growing watch brand.
As a startup, crowdfunding is a great way to raise the initial capital needed for your business to make the product and cover shipping. Just like pre-ordering, if done right, you should be able to generate a nice profit as well.
The benefits of investing your money in a franchise
Starting a business is never easy, fun or secure for that matter. However, if you feel like you don’t have a groundbreaking idea that will make investors pour money into your business, you can put a small initial sum into a franchise.
Most of the times, a franchise business succeeds because they don’t have to worry about branding, marketing and customer service.
If you feel this is your thing, you can check how you can start your cleaning, gardening or handyman business in Australia. With the home service industry growing every year, it’s a this is a very lucrative business opportunity.