Top 5 Ways to Raise Capital for Your Startup

Total
0
Shares

When us financial wonks write about business funding, we have a tendency to put the cart before the horse. You can find a million articles about growing businesses and increasing your annual yield, but that’s useless advice when all you have is a good idea and an empty bank account.

‍It costs plenty to get a new company off the ground – enough to make many a novice entrepreneur go broke in the process. Without a good financial plan, you can find yourself deep in the red long before your ready to do business; the greatest startup concept in the universe can’t withstand a lack of funds.

‍Insufficient capital discourages a lot of would-be business owners, but it doesn’t need to be that way. If you have a dream of running your own company, there are ways to ensure you have access to funds that will help you achieve those goals. This money doesn’t grow on trees, but it exists in abundance if you know where to look.

‍Every person, business, and investor has a different path; the road you take to entrepreneurial success might be any of the options below or a combination of all five. The more you know about each alternative, the better your chances things will work out.

1. Start Local

Even if your business model exists entirely online, people in your community will likely be the first to hear about it. That support system provides an instrumental role in the development of a new company, and it’s where you should start when looking for initial funding.

‍The country’s biggest banks get the most attention for their lending options, but local business development centers and SBA offices can set you up with the best loans and a more personal borrowing experience. When it comes to borrowed business capital, you don’t want to be another faceless name in a sea of anonymous entrepreneurs. If given the option to take money from someone interested in your business and community, that’s always the best choice.

The chamber of commerce in your city could provide a good starting place. If there’s a two- or four-year college in the area, you can check out the business resources available there. The success of local businesses is of the utmost importance to municipalities, so it shouldn’t be hard to find some source of guidance. You might even stumble upon a free program that sets you up directly with an investor.

‍In addition to taking local funding, you should gather local information. Find out what financing roadblocks might hold you up so you don’t get unexpectedly derailed. If you plan to open a physical store, meet with inspectors early and often to avoid fines and permitting issues once your project gets underway.

‍We can gather useful information online with great ease. Unfortunately, a business plan that worked for someone in rural Minnesota might not take in suburban Texas. Connect with the people you’ll eventually need to lean on for support. Learn from those who came before you and try to work with those who sincerely want your business to succeed.

2. Scrounge Like Mad

More commonly you’ll hear this method referred to as “bootstrapping,” insomuch as every penny you can muster will become part of the bootstraps by which you pull your business up. Whatever the case, the goal is to do your best with what you’ve got.

‍For many, searching for coins under the couch and liquidating an asset or two motivates their business launching process. The money flowing into the young company has a backstory that a loan can’t compete with. When you hear stories of people bankrolling startups through yardsales, it’s hard not to find that romantic and inspirational.

‍The bootstrapping approach typically involves debt as well. Instead of a small business loan, entrepreneurs will lean on credit cards for incremental funding. You’ll find this strategy to have very distinct pros and cons: with revolving credit, you can spend as necessary and have more freedom with repayment. However, you’ll likely have a higher APR and, if you get caught chasing, you’ll pile up more debt than you would have with a standard loan.

‍Before borrowing, think about how smarter budgeting might help your scrounging effort. Since you’re already going through the massive life change of starting a company, can you change other elements of your routine that might free up business funds? Perhaps a less expensive vehicle or a cheaper living arrangement? I would never advise someone to put their property on the line for a startup, but if you can downsize from a three-bedroom to a two and still live comfortably while helping your cash flow, that might be the right move.

‍The price of a startup overwhelms a lot of people, but you can get past that by reframing your thoughts about how you might cover those costs. Think about your assets, liquidity and potential overhead, then start crunching the numbers to see how much can be done with a little bootstrapping.

3. Check Out the Alternatives

Big banks want big borrowers. For the small operation in need of a sensible boost in cash, you should look into the alternative lending sites developed for just such financing needs.

You can find hundreds of online lenders with sufficient cash reserves and positive reputations. I think LendingClub is a strong option, but if you hear good things about another lender you should feel free to check it out. Above all, take the time to shop around to see what kind of rate you can get on a crowdfunded loan.

‍In general, the bigger the lender the larger the minimum loan requirement. When you’re opening a small company with yourself as the only employee, $25,000 might seem like way too much and even that is a small sum in the eyes of many lenders. With online options and crowdsourcing, you can get the amount you need and even have a mediocre credit score overlooked. Bad credit will still have its drawbacks, but won’t lead to immediate dismissal the way it does with traditional lenders.

‍Be very thorough as you inspect the fine print with an online lender. You want to make sure you aren’t securing a big loan with something you can’t afford to lose, and you’ll really want to be clear on when the loan will process so you don’t find yourself waiting on cash you thought would arrive instantly. The smaller lenders can sometimes sneak past regulators and operate a little more shadily, so ask questions, get reviews and make sure everything appears to be on the level.

‍Going with a smaller financier also opens the door to aligning with a lender who has knowledge about your particular industry. This is one of the major draws of federally backed SBA loans. Although approval doesn’t come easily, a processed loan will include assistance and advisors who want to see the company succeed. When loan amounts go down, lender investment oftentimes goes up, as the company providing the funds hopes success will lead to future borrowing.

With a consistent lender willing to give modest loan amounts, you can get through the opening of your business without putting yourself too far in the red. The less you play from behind, the better your odds of turning a profit within just a few years.

4. Find the Right Investor

A loan might put capital into your company’s veins, but a venture capitalist or angel investor can help ensure the money goes where it’s needed most.

‍As I’ve intimated with basic loans, it can be really helpful to get money from someone who understands your plight. The very best way to find such a lender is by going through an individual investor who backs companies that he or she understands and believes in. Just because an oil magnate has money doesn’t mean that person will be the right partner for a high-end coffee shop. Meanwhile, a low-profile restauranteur could bring all the advisor tools you need to the table.

‍To break it down very simply, you’ll be looking toward either a venture capitalist or an angel investor. These options are similar and yet tremendously different, so it’s worth educating yourself a bit.

Venture Capitalism

Traditionally, venture capitalists (VCs) operate as limited partnerships, making high-risk, high-reward investments on behalf of clients. These firms target growing companies that don’t yet have access to the equities market.

‍While there’s nothing stopping a VC from backing a startup with no business history, it’s not all that common. You’re much more likely to attract these investors if you have an existing product or IP and need a little help commercializing. This requires less effort from the venture agency and can deliver relatively quick returns. Business owners can also expect to put up a smaller percentage of their enterprise when the investment comes later in the process; if you get help in the very beginning stages, you might relinquish 30, 40, or 50% of your stake.

If your capital comes from a partnership with a board that’s working on behalf of a number of rich investors, you have to take the good with the bad. On the plus side, the VC is giving you money that doesn’t belong to them. They won’t make the investment without strong conviction. However, and this is the main argument against VCs, you’ll be one of many investments. If they hit on eight out of ten new businesses, that’s a good return. You invariably become a bit of a statistic, even with the investors eager to see your business do well.

‍VCs have different tactics, so you might find some that don’t quite fit the description above. By and large, you can expect to work with a venture capitalist firm if you’re able to secure this funding.

Angel Investors

Angel investors provide a more personal approach that brings more assistance and more oversight. With a proven entrepreneur looking to help your business succeed in exchange for a cut of the revenue, you gain street cred and the funds needed to get you the ball rolling.

Finding an angel investor can be easier than securing venture capitalist money. For starters, the amount needed for a business in the formational period opens the door for entrepreneurs who don’t want to invest millions of dollars. Tracking down angel investors usually proves easier as well, since a single wealthy donor can also be found virtually anywhere – next door, within the family, through a connecting website – whereas an investment firm interested in your project won’t be found just anywhere.

‍Speaking as an angel investor, I think this provides an exciting opportunity for everyone involved. People like myself enjoy taking an active part in our investments. I also find so much fulfillment in helping an entrepreneur turn their passion into a profitable operation. Meanwhile, having an angel investor in your corner can deliver not just a boost in capital, but connections and know-how that only come from years of experience.

‍The right investor can drastically alter the course of your business. If you fear losing control, you might not want to cede a stake in your company to a hands-on investor. On the other hand, if your primary goal is to get things up and running and you welcome a little help, start looking for angels.

5. Friends and Family

The quickest, most accessible, and yet often overlooked option. I understand the feeling of hesitation that comes with asking for help, especially when it comes to money. To approach mom and dad while you’re still $80,000 deep in student loan debt and ask for a business loan would be uncomfortable at best. The problem often lies in the framing of the request, though. A loan from Aunt Sue is much different than inviting Aunt Sue to join a business venture.

‍You won’t convince people to pony up for a cause they don’t believe in, so don’t put in the effort. At the end of the day, you only want money from people who care more about your project than they do the immediate return. It’s far better to have people pulling for you to succeed than watching over your shoulder and critiquing every misstep.

‍For these reasons, I’ve found that friends – and friends of friends – often make the best investing and business partners. Your parents and other relatives might not share your interests or passion for starting a new corporation, while a mutual acquaintance with a similar background could provide the funds, insight and energy you need to move things forward.

‍Through various businesses that I’ve owned or been a part of, I’ve crossed paths with dozens of people from all walks of life. In this diverse bunch of entrepreneurs, there were always common goals and dreams. They committed time and money to the project at hand because they cared about it, and that made all the difference.

‍If you need business capital, don’t be afraid to ask your family. Ask your friends and see if they know anyone who might be interested. Above all, search for people you want to work with and who seem interested in what you’re doing. If you’re just after the loan and not a working relationship, you’re much better off going through an alternative lending site.

‍Whoever you are, whatever you do, and wherever you’re starting from, the money needed to launch your company can be found. The easiest option might not be the best for you, so take your time to find the right source of funding. If you’re smart about the upfront financials, you put yourself in a much better position for success.

Leave a Reply

Your email address will not be published. Required fields are marked *

Let's Master Our Money

Get Our Daily Email Filled With Money-Morsels That Help You Make Smart & Informed Financial Decisions.

You May Also Like