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Home Business

How to raise capital for your business

Anna Johnson by Anna Johnson
May 31, 2023
in Business
Reading Time: 6 mins read
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How to raise capital for your business

Getting the needed funds to get ideas off the ground is every aspiring entrepreneur’s nightmare – well may be not all. If you happen to be a beneficiary of a large inheritance, you probably will not have any difficulty raising capital for your new business. For majority of others, however, finding the initial money to finance their business ideas is not as easy as having the idea in the first place. If you plan to get people to put money in your business as investors, you will need to work really hard at it to be able to convince them.

This will involve writing a convincing business plan, making persuasive presentations and a number of substantial pitches. Unfortunately, there are entrepreneurs who are able to do all these but their problem is that they do not know where to showcase their business ideas for financing. There are a number of ways to raise capital for your new business, but you will also have to evaluate the impact a particular funding source will have on your business before you decide to explore the options.

1. Family and friends

This is perhaps the easiest option by the book. If you have rich parents, uncles, aunts or friends with extra money to spare, they can be a cheap source to raise capital, particularly if they believe in your dreams and are willing to support you achieve that dream. Some of your family and friends will gladly give you money free of charge if they love and wish you to succeed in business, a lot of others will give you money as soft loans on very liberal terms.

The business community has stories of successful entrepreneurs who began with seed capital provided by their family members and friends. However, you have to be very careful the way you take financial helps from family and friends if you don’t wish to have problems with your relationships with them. The hazard of borrowing money from friends and family members is high so also is the reward when you become successful and carry them along.

2. Get a business partner

If you don’t have the required capital to finance your start up, you can resolve the challenge by sharing the burden with a partner who will contribute part of the capital. The partner will not only come with his portion of the seed capital but also with his experience, knowledge, expertise, social network and all that he can bring to ensure the success of your start up. However, being in partnership means that you are no longer the sole owner of your business.

Your partner becomes an integral part of the business, may take part in its running or at least in taking critical decisions as well as share in the profits. It is not also very easy in choosing a partner. Not everyone who has money can be helpful in your business so you will need to do proper due diligence in selecting a partner to do business with. See it like a marriage, if you have a spouse whose goals are in variance with yours, the marriage will likely collapse.

So, it is with business. One way to avoid issues is to have a well-crafted partnership agreement where roles are defined, profit sharing formula clearly spelt out and possibly insert and agree on exit strategy for the partner. In this case, provision can be made to empower you to buy your partner out after a given period of time. Seeking a business partner is an easy way to finance your business idea if you are properly guided.

3. Crowd funding

This source of business capital; especially for startups is gaining popularity ever since Michael Sullivan coined the term in 2006. Simply put, crowd funding the provision of funds for a business by a large number of people through an organized platform, usually online. Crowd funding websites now offer unique opportunities for entrepreneurs to get money to fund great business ideas.

Some are equity based which help raise equity investment for projects, some are reward based, which allow the beneficiary of the funds to offer some rewards to investors. There are lending crowd funding platforms which help raise loan capital while donation based crowd funding allows individuals to contribute to a project ex-gratis.

If you have a sound business idea, try raising funds through crowd funding. Take your time to research the best crowd funding websites available, understanding their rules and package your project in line with their requirements. A growing number of startups have raised substantial amount of capital through crowd funding websites.

4. Angel investors

The angel investment community is another source funding available to startup entrepreneurs. Angel investors are usually wealthy people that set some money aside to provide long term equity for viable projects. The trend nowadays is for a collection of these wealthy people to come together in what is known as angel investors network for syndicated investment in big projects. If you are able to attract funding from an angel investors network, you will get much more benefits than just the financing.

Since angel investors are likely to be successful businesspeople or corporate icons, they are able to provide you with valuable advice and guidance to help you build a successful business. To get angel investment into your business, visit the website of the angel investors network of your choice, create your profile and post your pitch, interested investors read your posts and get in touch with you, you negotiate terms and sign the papers.

5. Startup incubators

Also known as startup accelerators, these are organizations that collaborate with other organizations, individuals and public institutions to provide a cocktail of assistance to startup businesses. The help is usually in the area of financing, training and mentorship. They select beneficiary based on competitive processes which may include pitching, business plan writing and thereafter put shortlisted candidates through a training process. Successful candidates are then given some level a funding in form of grants. Startup accelerators can be helpful places to get started.

6. Venture capital

Venture capital organizations also assist early-stage business or businesses desiring growth with required funding. Venture capitalists provide funding in form of equity or debt, structured in line with the recipient needs. Venture capitalists usually inject huge funds in the target business and as such will normally require a seat on the board of the company and in some cases senior management position. 

This is done to protect their funds which are normally retained in the organization for a specific period of time. Venture capital conduct long due diligence and viability studies on businesses they invest in. So, you have to be on top of your game if you want to consider venture capital funding.

7. Government funding schemes

There are a number of governments funding schemes designed to assist entrepreneurs with capital at friendly interest rates. Some of the schemes include those aimed at empowering the youth, women, or Micro, Small and Medium Enterprises. Unfortunately, due to ignorance, few small business operators access these intervention funds that are available for virtually all category of enterprises such as agriculture, textile and garments, cottage industry, energy and power, automotive industry and so on. 

These funds are very good alternatives to bank loans which in any a case are hardly available to SMEs due to stringent lending requirements that banks and other financial institutions will want borrowers to meet. Why not take steps to access them today. They are cheap, less stressful and usually of longer tenor providing you with adequate time to utilize the funds and repay with minimal interests.

8. Join a cooperative society

Many entrepreneurs are yet to realize the power of cooperative societies in spite of the fact that this kind of business organization have existed for centuries. Cooperatives are voluntary organizations which exist to help members achieve collective and individual’s goals. There are cooperative for farmers, artisans, traders, financial services providers, professional people, name it. 

Cooperative societies usually pool resources together to assist members in need and when it comes to accessing business capital from funding agencies or even commercial banks and other financial institutions, the power of cooperative arrangement make it easy for these organizations to get money for the benefit of their members. Lenders are comfortable dealing with groups than individuals. Your cooperative can help you raise capital for your business. If you need funding, find a cooperative related to your industry and join today. 

9. Loans from commercial banks and other financial institutions

Though not advisable, another source of funding for your new business can be loans from commercial banks and other financial institutions. Bank loans are usually short-term and are best suited for working capital financing. Using bank loan to fund your equity needs will put your business under pressure in its formative years. What you need for your new business is stable long-term funding that will allow you do proper planning and grow organically over a period of time. 

Such funds are usually in form of equity investment, structured debt capital or grants. Banks are also reluctant to fund startups due uncertainties surround their survival and even for mature business financial institutions may still be reluctant because many small business operators fall short of banks’ lending criteria as a result of poor structure, lack of institutionalization and the need for collateral amongst other reasons.

Conclusion

The sources highlighted above can provide you with such stable long-term funding for your business. Spend time to do some research on how you can explore some of these opportunities to deliver that business idea or grow an existing one.

Tags: Money
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