The long and arduous yet fascinating business journey necessitates a lot of cash and time investment from just a concept to an income-generating business. Recent studies show that over 93% of startups fail in their first year of operation. Inadequate funds turn out to be the leading cause of their premature death.
That’s why an entrepreneur, at some particular time, must have a plan on how to finance their startups. The amount of finance and when you’ll need it largely depends on the type and nature of your business. This article is a compilation of different strategies to help you understand how to raise money for a business.
How to Raise Capital for a Business
1. Bootstrap Your Business
At the early stages of your business, few people will believe in your business concept as much as you do. As a result, you may be forced to put your money where your mouth is and begin investing what you have.
For example, most entrepreneurs try to pitch their ideas to different organizations and investors who mostly turn them down because they think the ideas are impractical or the business won’t sell.
After numerous attempts to raise capital for their exceptional business ideas in different fields, most entrepreneurs give up and toss their ideas into the trash. However, a few invest whatever they have into their business ideas and start small.
For example, Sara Blakely, the founder of Spanx, invested her entire life savings of $5,000 after numerous failed attempts to get outside funds from investors and organizations.
Today, Sara’s business, which investors thought would not be worthwhile, is valued at more than $1 billion. And since its launching till date, Spanx has never sought a single dollar from financing organizations or outside investors.
At times, if your business concept is as exceptional as you think it is, you may have to stand up for yourself and make a few sacrifices.
Often, personal investment into your business can be interpreted by financial institutions and investors as an indicator of your confidence and strong faith in the potential of your business.
Besides, if you’re reluctant to put your money into your business idea, why would anyone else put in theirs?
Even so, investing your money to start a business is associated with many risks. Therefore, you should conduct intensive research on the probable risks.
2. Startup Competition Exhibitions
Exhibition events are an excellent way for startups to generate capital. They offer entrepreneurs and company owners opportunities to present their solutions by pitching and showcasing their ideas, business plans, and why they require money.
In these competitions, you get to present your product and services to investors and possible business partners if you have a great business plan and a solid understanding of what your startup provides. They’re then interviewed by business leaders and investors who ask them about various aspects of their business concept. In the end, investors sponsor the winner.
What’s more, these programs also offer an advertising opportunity for your business to many people. So, even if you don’t win, other investors or financing institutions may be attracted to your startup proposals and decide to invest in your business.
The following are steps you can take to make an excellent pitch:
Do Your Research
When looking for the ideal pitch contests for your firm, research extensively to ensure that your company’s objective or market is compatible with the event. Also, compare your pitch to the firms that have won sponsorships from the competition in the past.
Create a Pitch Deck
Your pitch deck is not intended to replace your complete presentation but rather elaborate your ideas and give valuable examples to help you pitch. Bear in mind that the audience may find text-heavy slides dull. So, to make an impression while presenting, you can simply use innovative pictures to supplement your words.
Rehearse Your Pitch
Competition exhibitions give entrepreneurs only minutes to convince the audience that their idea is the best. Therefore, you cannot afford to mess up from the first minute. It would be best to rehearse multiple times to help you master every bit of your business concept. Additionally, you can come up with answers to probable questions and look for their responses before facing the panel.
3. Launch A Crowdfunding Campaign
While crowdfunding is a relatively new method of raising capital for startups, it has gained popularity recently. Essentially, it’s like taking out a loan, contribution, pre-order, or investment from more than one individual at the same time.
Entrepreneurs create a thorough description of their business and post it on a crowdfunding platform. They’ll discuss the objectives of the company, plans for profit, how much funds they’ll need and why, and so on. And then investors who read about the business may decide to put in their money if they like the idea.
Those investing their money will issue online pledges with the guarantee of pre-buying the product or making a contribution. Anyone can invest money to support a firm if they believe that the business idea can succeed.
The best thing about crowdfunding campaigns is that they can also generate interest and help market the business and raise funds. Additionally, crowdfunding is an excellent solution if you’re unsure whether your future products will get demand.
By putting financing money in the hands of ordinary people, this procedure eliminates professional investors and brokers. Furthermore, it can attract venture-capital investment if a firm has a specific successful campaign.
However, consider that crowdfunding campaigns are a competitive niche to secure money. So, unless your business idea is wholly exceptional and can capture the attention of a regular consumer with only a description and a few online images, you cannot get funds through crowdfunding campaigns.
4. Take Out a Loan
Even with the advent of financial technologies that offer financing alternatives, traditional loan products are still the primary source of funds for many startups. According to an SBA (Small Business Administration) report, nearly 75% of funding for startup businesses is acquired from business loans, lines of credit, or credit cards.
Generally, startup loans with the best terms and rates come from banks and other upstreet financial institutions. You must meet the following requirements to get approved:
- Your business must have been operating for at least two years
- Your business must have a solid annual return (generally at least $100,000)
- Have a good credit score, for example, a score of 640 or more
However, these rules are flexible and may vary based on the lending institution. However, if you fail to acquire loans with favorable terms and conditions, there are alternative, although more expensive, ways of financing your business.
You could go for invoice funding to get the cash quickly if you have unpaid bills. Or, consider equipment financing if you want quick cash for tech devices, machinery, office furniture, and so on.
Before applying for a business loan, assemble any loan documentation you may be required to submit before time. Usually, the lenders require a business’ statements, tax returns, balance sheets, and other financial statements. Though rare, you may also examine your details in some situations.
5. Ask Friends and Family
Research shows that raising funds through colleagues and relatives works for some business owners. According to the Global Entrepreneurship Monitor (GEM), 5% of US individuals have financed a firm founded by a friend or family member.
Caron Beesley, a digital marketing consultant, and SBA contributor, recommends choosing a colleague or relative with strong business abilities. She also recommends that you limit your list to family members or friends who believe in you, know your intentions, and know the hazards.
After that, Beesley emphasizes demonstrating enthusiasm and devotion by having a solid company strategy and direction. Moreover, be honest as to how much cash you require.
Finally, decide on how the funds will be distributed. They might be in the form of a loan or stock in your firm. If the amount is a loan, make a repayment schedule and utilize a peer-to-peer lending platform to document and monitor the debt.
6. Look For an Angel Investor
Angel investors are accredited people with a net value of more than $2 million or an average income of more than $400,000. They usually work alone but may create a fund with other business angels.
First and foremost, you must have a sound business strategy in place as well as a compelling pitch ready. Make sure to express your passion and entice the investors with data points regarding your company’s present condition and future possibilities. When you have these details ready, angel investors may be an excellent source of funding for your company.
You may be asking how you go about finding angel investors. This may appear to be challenging, but there are several resources available.
Funding Post, for example, organizes angel investor displays around the country. And the Angel Capital Association is a fantastic resource for finding, meeting, and arranging pitches for angels.
7. Look For an Angel Investor
Venture capitalists (VCs) like to invest in slightly more developed businesses than investment firms, and they may desire more control over daily operations.
VCs desire scalable and working capital optimistic firms with established and scalable goods and operations since they can implement specified returns for the company or fund.
If your company meets these criteria, you may be eligible for a VC business’s investment. It’s not easy, but it’s something that many small firms have done effectively.
The success of your pitch is critical to receiving money. “You need to explain why an investor should consider your business idea in the first 10 minutes,” says Sequoia Capital, one of the world’s most successful VC companies. According to Sequoia Partners, you can achieve it in three easy steps:
- Describe the changes: Describe the innovation, market shift, or challenge your organization sees as significant opportunities
- Describe what you do: Show how your organization can take advantage of this opportunity in one phrase
- Describe the facts: Quickly learn about your company’s history and financials. Make a numerical representation of the opportunity. Discuss the members of the team, as well as their skills and expertise
8. Get Creative
Other unconventional ways to fund your company include collaborating with an existing company and exchanging exclusivity or first rights for funds. Other ventures, such as developing websites, blogs, and other sources that generate advertising money, can also be used to fund your new firm.
Some entrepreneurs have successfully pitched on reality TV series and used both the money and the publicity to launch their businesses. Remember that investors want to earn money, and if you can show them that you can, they will ultimately listen.
These are just a few typical methods entrepreneurs use to obtain cash, but don’t stop there. Your financial requirements will fluctuate as your firm expands. Always attempt bootstrapping first, and then seek outside capital if needed—nothing is worse than being locked out of the firm you founded.
9. Use Your Surplus Assets
An asset is any valuable property or item that you own.
Houses, land, automobiles, jewels, stocks, bonds, and other short/long-term investments are examples of high-value assets.
Assets can be an excellent source of money since they can be converted into cash and used to fuel your firm, or they can be used as collateral (security) for a bank loan.
Deciding to trade an item we value for business funds is frequently challenging, especially with emotional links. Some assets may be associated with powerful memories, or they may speak to our fashion sense and social status.
In any event, you will be the one to determine whether selling your inherited home or the Rolex watch your grandpa gave you is a worthwhile sacrifice for realizing your company ambition.
A good example is a customer who has to make the difficult decision to withdraw his retirement assets and sell some real estate to establish a transportation and logistics company.
Some people, though, have come to regret similar actions. This frequently occurs when you overestimate or overlook the essential risks commonly associated with the type of business you wish to establish.
10. Apply for a Grant
One advantage of acquiring funds is that you do not have to repay anyone. So, set aside the interest payments and unsolved debts and start applying for grants. Both the government and private organizations provide multiple alternatives.
Even so, there is an adage that “nothing in life is free.” Grants, for example, are highly competitive. If you desire money from a specific institute, you’ll have to put in the effort and demonstrate your value. Similarly, once you’ve registered a firm, it’s strongly advised that you apply for various licenses.
To investigate the many government alternatives, you can use the SBA’s Grants programs or hunt for a particular department, depending on your industry. FedEx, Walmart, and Wells Fargo are a few private companies that provide small business grants.
If you wish to grow, you will most likely need outside funding. If you bootstrap and do not get external finance for an extended period, you cannot capitalize on market possibilities.
While the abundance of funding choices may make it simpler than ever to get started, sensible company owners should consider how much financial support they genuinely require.
It is preferable to start with solid corporate governance from the outset, as it may be challenging to go back later and try to exercise fiscal discipline. Invest in decent accounting software and maintain your funds to handle these problems.
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