How to raise capital for your new business
Whether you’re starting a business as a hobby or side job — or you want to take over the world — it’s an exciting adventure … and one that requires an incredible amount of desire and hard work. You have to plan, plan and plan. Where should the money be spent? What are the priorities of the business? How much needs to be saved to get things started? And most of all, you’re probably wondering how to raise capital for your new idea.
When it comes to raising capital for a new business venture, there are lots of things to take into consideration. But what are some of the best ways of addressing how to raise capital? And what can the business do to get more funds, if things are starting to falter?
It seems plainly obvious, but it’s what a lot of new business owners do. It could be through re-mortgaging, the sale of a big asset, or even saving for several years. By self-funding, it’s unlikely you will have any repayments to make — and you have total control over the business.
Some new startup owners like to go down the route of using a credit card; however, this can be dangerous, as you end up having to pay it off like any other loan, except without any of the benefits of repayment terms.
Alternatively, new business owners tend to turn to friends or family for extra means of capital.
This can be a brilliant means of raising funds, as you are borrowing money from someone you trust and rely on. It can also allow you to come to an easy repayment structure, which allows both parties to manage efficiently.
If things don’t go well, you could be hugely indebted to those depending on you. If you are to borrow money from friends or family, it’s vitally important to make them aware of the risks and losses that can occur.
Investors come in different shapes — sometimes they are business entrepreneurs looking for new opportunities, whereas recently angel investors have begun forming groups to spread the risk. Investors will typically need a lot of persuading and are difficult to even get in front of.
Although investment is difficult to maintain, it can be massive plus for a business figuring out how to raise capital. There is no loan repayment to make, and an owner would be able to use all the help and experience of an investor.
On the negative side of things, an owner would typically have to sacrifice a percentage of their business to the investor. This might seem like a small price to pay at the beginning, but if it is a success, it could be a lot more in the long run.
A partnership can offer much more than a fantastic way of sourcing additional funds. A partner can aid you with all the day-to-day aspects of running a business, as well as planning, budgeting, accounting or anything else. Importantly, a partner will help share the workload.
On the flip side, having a partner can dilute you might want to do with the business, which can lead to disagreements and disharmony within the ownership team.
Strategic partners work in a slightly different way, as they are usually two separate businesses which run in the same sector. But they can be mutually beneficial to each other, recommending work and effectively feeding each other business.
Commercial finance broker
Although not a means of how to raise capital directly, commercial finance brokers can help a company find some of the options available. A broker will shop around and discuss possible options. These might be bank loans, crowdfunding, asset finance and investment opportunities. A broker could help save a huge amount of time and with their experience and expertise, which could help you find the best possible deal.
How to raise capital when you’re in trouble
How to raise capital when the business is in trouble is potentially harder than getting cash for a startup, as there is more risk involved. However, if the business can genuinely work and has simply been unlucky, there are some solutions available.
If late-paying clients are affecting your cash flow and halting up the business proceedings, invoice finance can work as a fantastic option. Invoice financing lets a business obtain an advance based on the value of late, unpaid invoices.
This can free up cash you are owed, as well as allowing you to focus on other areas of the business, as opposed to chasing clients.
A factoring company will assess the quality of your invoices before deciding on the potential risk involved with lending. They will then advance you a sum worth a certain value of your invoice, collect payments from your clients, and then take back the fee they’re owed before returning any remaining change.
Getting a bank loan is an option if your’re consideirng how to raise capital. However, if the business is in desperate trouble, these can be time consuming with no guaranteed result at the end. Banks have always maintained a response that they want to loan, but over recent years, they have heavily tightened up their lending criteria.
If you can prove that the business can genuinely work, but things have unfortunately gone wrong and the business has halted, then banks might be willing to lend, but may require security as a backstop.
Unless you can prove that the business can succeed and the model works, it’s unlikely that banks will lend to you.
Perhaps one of the easiest options is a business overdraft. This can provide a stable amount of money to fall back on if a business hits a bit of trouble. An overdraft is agreed with a bank beforehand and is designed to meet what the business needs.
If this is a relatively small amount, usually the bank will lend unsecured. But if it is a larger amount, for a long period of time, a bank would normally want security to cover themselves.
So now that you’ve got a firmer grip on how to raise capital for your business, you can start making strides toward bringing your idea to life. Get out there, get funding, and get started!
Editor’s note: Just starting a business? Be sure to secure a domain name and a professional email, even if you’re not ready to build a website just yet. You’ll want to protect your name and communicate professionally with potential investors, clients and more, and a domain and email will help you do just that.
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