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Six Proven Strategies for Raising Business Capital
By Quiet Light
Dreaming about owning your own business is incredibly exciting! But often bringing those ideas and hopes into reality requires raising capital. Navigating the process of raising business capital can be intimidating, but the right strategies can go a long way in helping you experience success.
Whether you’re buying an existing business or bootstrapping from the ground up, there are many options for business funding out there.
In this article, you’ll learn:
- Six proven ways to raise business capital
- The documents you need to design and gather during the capital-raising process
- How to decide which capital raising strategy is the best for you
Six ways you can raise business capital
Although there are numerous ways you can raise business capital, six of the most proven paths include:
- Raising the business funds yourself
- Asking friends and family to invest in your business
- Crowdfunding your startup costs
- Applying for a business loan
- Connecting with an angel investor
- Working with venture capitalists
Raise the funds yourself
Some business industries such as manufacturing or transportation require a large amount of business capital. On the other hand, consulting and freelance businesses have a minimal amount of startup costs and could be successfully self-funded.
If this is the first business you’re starting, think twice before investing your entire life savings into this new business venture. But if you’re a serial entrepreneur with a proven business track record and business street smarts, it can be more feasible to invest significant capital yourself.
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It’s possible to raise business capital by making regular deposits into a savings or investment account. Then, when you have enough saved back to get the business off the ground, you’re ready for the next steps.
Bootstrapping your own business, whether through personal savings or business credit, could mean that it takes longer for your business to get up and running. However, when future potential investors look at your history of personal investment into your business, it can encourage them to invest, too.
Consider family and friends as potential investors
It might feel awkward to reach out to your parents, aunts, uncles, and college friends to raise money for your business dreams. But you might just have the business connections that you need within your personal network.
Do you have friends or family members who own their own business and know about the startup grind? Or maybe you have a family member who understands your business plan and is confident that you’ll succeed. It’s worth having a discussion about whether or not they’d like to invest in your business.
Adding friends and family into the capital raising process could lead to additional stress. If you go this route to raise business capital, set clear boundaries and define expectations. For instance, if the money is in the form of a loan, agree upon a repayment plan and document the entire process.
Crowdfund your financing
Many entrepreneurs have seen great success using a crowdfunding capital raising strategy. Brands such as Allbirds, Brooklinen, and Peloton all raise capital and brand awareness on crowdfunding websites.
Whether it’s creating a GoFundMe page, filming your Kickstarter video, or logging onto Indiegogo, crowdfunding could be a great way to fund your business and start establishing product recognition with customers.
Apply for a business loan
Applying for a business loan is another option for raising business capital. Lenders will look through your documentation to determine your eligibility. If you are eligible, they’ll determine how much of a loan they can offer you.
Although not all lenders and financial institutions require the same documentation, you will more than likely need to provide:
- Your personal financial statements
- Tax returns
- Loan application forms
- Business plans
Business loans aren’t for every entrepreneur. For example, if you have a low credit score, your loan application might be rejected by financial institutions.
Connect with an angel investor
Another option for raising business capital is receiving funding from an angel investor. Often referred to as angel investors, private investors, or seed investors, these are wealthy individuals who provide funding for small businesses or entrepreneurs. Usually, this investment is exchanged for ownership equity in the new company.
If you’ve ever watched an episode of Shark Tank, you’ve seen the process of someone connecting with an angel investor. In order to raise business capital through an angel investor, you’ll need to ensure that you have a defined business plan you can share.
Angel investors might provide a large source of funding at the beginning stages of your business. Or, they could invest regularly throughout the startup process to help a business through the sometimes rocky first steps.
Finally, you can raise business capital by working with a venture capitalists firm. Venture capital can be a great option for small businesses and startups who expect to see fast growth and will need sustained funding.
Venture capitalists don’t just invest in new businesses and startups, though. They also invest in more mature companies than seed investors. So if you’re a business owner who is taking their business in a new direction, working with venture capitalists could be a great option.
Applying for an investment from a venture capital firm is a complex process. However, many entrepreneurs have been through the process successfully.
Documents to gather and create while raising business capital
The exact documents you’ll want to prepare will depend on the capital raising strategy you choose. For instance, if you’re applying for a small business loan, your stack of documents will look different than the entrepreneur pitching their business to an angel investor.
Some common documents you’ll want to put together to raise capital for your business include:
- Company profile
- Pitch deck
- Financial model
- Term sheet
Your company profile
If you’ve ever created an online dating profile, you know the importance of giving a good first impression. Your company profile is a succinct, tastefully designed one-pager that you’ll use to introduce your business to potential investors.
Normally, this document will be the initial way an investor learns about your company. This is not the time or place to share in depth market analysis or difficult to interpret financial projection graphs. Instead, quickly share about the market, who you are, how you’re expecting to grow, and why now is the perfect time to invest in your business.
A well designed company profile that shares exactly what investors need to know at a glance is a great way to communicate that you are well organized and putting in the time and effort required for successful capital raising.
A pitch deck
A pitch deck is a short presentation that you can use when presenting to potential investors. This presentation should give a brief overview of your business plan, the products or services you’ll provide to customers, and growth traction.
Within the slides of your pitch deck, you can introduce yourself and your business dreams. After investors get an idea of who you are and what your goals are, you can discuss how your business solves particular problems customers are facing.
Other aspects of your business to include in your pitch deck are:
- A quick assessment of the current market and where your business fits in
- A slide featuring products or services that you already offer or plan to sell
- What growth looks like for your company and how you’re planning on meeting goals
- An introduction to different members of your team and their roles in your company
- An overview of the competition your business faces and what sets you apart
You’ll close the presentation by sharing a clear and concise “ask” with potential investors. This should not only share exactly what kind of capital you’re raising, it should also include a plan for how you intend to use the capital within your business.
Finish your pitch deck out by showcasing the metrics, solutions, or business highlights you want potential investors to remember. Always leave room at the end of the pitch deck for questions, and come prepared with answers to questions you think investors might have for you.
A financial model
The financial model includes all of the important financial documents as well as information about your future business projections.This document should include all of the data points that investors can dig into after listening to your business pitch.
Being able to share nitty-gritty financial numbers and projections after your pitch not only establishes yourself as knowledgeable about your business, it also is a way to keep the conversation going about their potential investment.
Documents to include in your financial model are:
- Your business income statement
- Balance sheet
- A statement of retained earnings
- Historical cash flow statements
- Research and development costs
- Expected hiring and operational costs
Remember when you were in high school geometry class and you had to show your work? When it comes to business financial projections, be prepared to share with investors exactly how you arrived at the number you share with them.
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The term sheet
You made a good first impression with your company profile and answered all an investor’s questions through your pitch deck and financial model. Now you’re ready to negotiate with potential investors on how much they’ll invest financially in your company and what they’ll receive in return.
A term sheet is a document that contains all of the details surrounding a business investment. This document provides a clear framework for both you and investors. Within your term sheet, you will want to include:
- Details on the amount of the business investment
- How much your company is valued at before and after the investment
- Whether or not the investor will have a share within your company
- If an investor is a shareholder, what privileges are included
- Whether or not investors will have a say in director or board appointments
- Whether or not an investor has a say in critical business decisions
A concise term sheet can set shared expectations up front between you and investors. Having this information put together could save you additional negotiations or multiple rounds of redrafting the investing agreement.
Creating capital raising strategies for your business
It can be tempting to jump right into making a pitch deck or spend hours at your computer researching potential investors. But putting together your strategy for exactly how your business will find funding is the essential first step.
Deciding what strategy is a good fit for your business goals
When you need to raise capital for your business, you can choose from one of three capital raising strategies:
- Debt financing
- Equity financing
- A hybrid model of debt and equity financing
The best capital raising strategy for your company is one that helps you reach your business goals and meets your financial needs—both in the present moment but also in the future
We’ll take a closer look at each of these options, as well as to decide which is the right move for your business.
Debt raising is defined as raising capital by borrowing money, then paying it back with interest. The most common way you can go about debt financing is through a loan. Additional debt raising options include business lines of credit, business credit cards, personal loans from friends and family, SBA loans, or peer-to-peer lending services.
Debt financing might be a good capital raising strategy if you:
- Qualify for a business loan
- Want to be in control of business decisions without investor input
- Are looking for a short-term financial relationship with a lender
One benefit of debt financing is that you retain all control of your company. Although the bank will expect repayment on your loan, they aren’t going to sit in on your board meetings and tell you how they’d like decisions to be made. It’s also beneficial that debt payments are usually tax-deductible. Often, debt raising will cost your company less than equity financing.
Meanwhile, the main disadvantage of debt raising is that paying back a loan is a regular expense. If the economy takes a downward turn or your business isn’t as profitable as you expected, you will still need to make regular payments on your loan. These payments might inhibit business growth. If your business has inconsistent cash flow, debt raising could be a risker route than equity raising.
Equity based capital
On the flip side, equity raising occurs when a business sells a portion of their company equity in exchange for capital. For example, you might be looking to launch a new product. You might decide to offer 5% of ownership of the company to an investor in return for the capital you need for a successful new product launch. Now your new investor owns 5% of your business and has a say in how you run the business.
Common equity raising strategies include angel investors, capital venture firms, and crowdfunding.
Raising business capital through equity financing could be a great fit for your business if you:
- Want access to seasoned business professional advice
- Don’t want to take on debt to grow your business
- Are comfortable giving up a portion of control of the business
The benefit of equity raising is that it doesn’t come with regular payback expenses. This means that you won’t go into debt building your business. If your business doesn’t qualify for a business loan, equity capital can be a great option.
However, the main disadvantage to equity raising is that in exchange for capital, you’re giving up percentages of ownership of your business. That means that you’ll need to consult your investors about decisions that impact your company.
Combination capital raising
Finally, you can have the best of both worlds with a hybrid model of capital raising. Capital raising options that combine debt and equity raising include convertible bonds and convertible preferred shares.
Combinations of debt and equity capital raising often provide more flexible arrangements for both the company and the investors. Because it includes the benefits of both debt and equity raising, these hybrid models can lower the risk for both the business owner and the investors.
The disadvantages of combination capital raising is that the agreements tend to be more complicated than debt or equity financing. It’s also important to be aware of the terms of the agreements, since hybrid capital raising tends to benefit investors over company owners.
Raising the capital you need to build and grow your business can be exciting. But landing the funding that your company needs can seem like a more intimidating task than running the business itself.
Take time in the beginning of the process to define your business goals and your capital raising strategy. Then, once you know exactly how much capital you need and how you want to go about raising it, spend time gathering and designing documentation that ensures investors that you’re serious about building your business.
After you’ve practiced your pitch over (and over!), you can confidently walk into corporate finance offices or meetings with potential investors. You’ll be ready to share your business story with them and field any questions they might have.
If you invest the time and energy into preparing for the capital raising process, explore every option available to you, and understand the risks, you can secure the funds that you need with a minimal amount of frustration and stress.
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