Want to hire more staff, buy a commercial property, or invest in advertising? Every business needs money to maintain operations and reach new customers. Some business owners make enough money on their own, but others may need to raise funds to get started or scale their companies. For example, a small business owner who can keep up with expenses may need financing for a larger purchase, such as property or new equipment. Raising money is an important skill for any business owner. Discover the strategies you can use to raise money and how to prepare in advance.
Raising Money for a Business
Most companies need to raise money to make critical purchases and achieve long-term goals. Business owners use capital to buy goods, services, and assets. Most business owners think of banks and credit unions, but you can also get funding from an online lender and other avenues. Looking into a greater range of options can help you get financing sooner and on more favorable terms.
Things to Do Before You Start Raising Money for a Business
The best results come from meticulous preparation. Following a few steps before raising money will help you get more capital and more reasonable terms. On the other hand, not preparing in advance can fuel desperation, and rushing to find money from the first entity can result in unfavorable terms. Here are some ways to prepare before asking lenders and investors for capital.
Know How Much Capital You Need
Is a $1 million loan enough to fund your business? Many small business owners would be happy with that loan, but you pay interest on the entire principal, even if you only end up using $50,000. Closing costs also increase if you take out a higher loan amount since they are equal to a percentage of the loan’s total. Asking for too much money increases your interest payments, even if you do not use the entire loan. Knowing how much you need can prevent excessive spending.
Business owners should know how they will use the funds and estimate costs. You can request 10% more capital than necessary to create a margin of safety, but you shouldn’t ask for too much. Asking for less capital will also increase your odds of getting funds. The conversation will go very differently if you ask a bank for $1 million versus only asking for $50,000.
Make a Business Plan
Lenders and investors don’t part with their money easily. These groups have been burned before, and they want reassurance that you will repay the loan or reward them for taking early equity positions. A business plan indicates how you will use the funds along with your future vision. Lenders and investors can review your revenue and earnings projections for the next 3-5 years, depending on your business plan’s level of detail.
Lenders and investors should also review this business plan and have confidence that you can compete with other companies in your industry. Business owners who cannot demonstrate a competitive advantage or the ability to gain market share will have a more difficult time raising funds. Most small business owners view their companies with high regard. A business plan gets lenders and investors on the same page and makes them more confident to invest in you.
Create a Business Valuation
A business valuation is more important for equity investors than lenders. Banks, credit unions, and online lenders will look at your financial statements to gauge your company’s revenue and consistency. Equity investors buy a percentage of your company.
You can use the equity to make investments into your company, but the equity investor will wonder how much of the company they obtain. Does a $10,000 investment give them a 2% stake in your company or a 20% stake? That’s a significant difference between you and the equity investor. Some business owners don’t want to give up a 20% stake, but the equity investor also doesn’t want to feel like they’re getting swindled.
Creating a business valuation that considers your company’s revenue, projections, industry potential, leadership, and other factors will help you arrive at a fair value. Most investors prioritize revenue, projections, and the industry when buying into companies. Therefore, it’s good to look at comparable companies in your industry to see how they value themselves. If it’s normal for companies to value themselves at 5x annual revenue in your industry, you can use that as a starting point.
Network with Potential Investors
Asking an investor to provide equity is challenging enough, but it’s even more difficult if you are meeting investors for the first time. So before you raise money for your company, start networking with investors. Networking helps investors become more familiar with your company and what you have to offer. These meetings are important because some investors invest primarily in the person, and they may tell colleagues about your business.
Networking creates more opportunities, and no business owner should put networking on the back burner. You never know who you can end up meeting or who knows who. If you do enough networking, you will have several investors lining up to provide capital in exchange for a stake in your company.
Ensure Your Documents are Complete
Lenders and investors will ask for documents to review financial information about your company. No one will take a business owner at their word about revenue and earnings. That’s a substantial risk for any lender or investor. They will want proof that you generate enough revenue. Lenders want to make sure you can repay the loan, and investors want to make sure they are getting a fair percentage of company ownership based on their investment. Most lenders outline the required documents on their websites, and investors tend to ask for similar documents. You’ll also have to provide an Investor Pitch Deck if you want to raise equity. The pitch deck summarizes key details about your business plan, financials, and projections.
How to Raise Money for a Business
After you have made the necessary preparations, it’s time to raise capital for your business. Business owners can use the following avenues to raise funds for their companies.
Crowdfunding
Crowdfunding involves a flurry of small donations with incentives based on the amount of the donation. This capital-raising strategy keeps your equity safe and can provide sufficient capital for your business. You can offer digital incentives and other perks that cost less than the size of the donation. People use crowdfunding campaigns for various purposes, not just business growth.
Angel Investors
Angel investors can buy a stake in your company and provide capital to help you get started. Most angel investors also take on a mentorship role. They provide guidance from their years of experience that can help your company gain market share.
Venture Capitalists
Venture capitalists follow a similar model as angel investors, but not all of them provide the same type of guidance and support as angel investors. Venture capitalists may have more connections that can help, but they may have stricter repayment windows than angel investors. Venture capitalists may not stick around after receiving their investment in return plus additional proceeds to justify their risk. Depending on the venture capitalist, you may only have five years to repay their initial investment.
Grants
Various organizations award grants to business owners with potential. You may have to compete with hundreds or thousands of business owners for a small number of grants, but they’re free capital for your business. You do not have to repay a grant and can use the funds in any way you desire. This means no debt, and you also get to preserve your equity. Finding grants and applying for each one can take a bit of work, but the reward is capital with no strings attached.
Friends and Family
Your friends and family may be willing to help you out when you are getting started. Getting funds from family and friends can be more affordable than other options. Some will do it out of the kindness of their hearts and expect nothing in return. Others may ask for the principal to be repaid over a few years but not tack on interest.
You can get generous terms from friends and family, but it’s critical that you pay them back on time. Even if a friend or family member does not ask you to repay them, you still should set up a plan to repay them. It’s the right thing to do if you borrow money from them, and any money issues with family and friends can damage relationships. This route can help you access quick financing and get the people you care about more interested in your business but only ask for money if you are confident in your ability to repay them.
Spare Personal Assets
Every business owner should separate their personal and business finances, but personal assets can give your company the jumpstart it needs. Business owners with personal assets have many choices. Some business owners may sell stocks, while others may take out a home equity line of credit. These investments in your company can yield a positive return, and you won’t have to worry about giving up equity. In some cases, you won’t even have to worry about monthly loan payments.
Government Subsidies
The government offers tax breaks and business grants that can give your company the funding it needs. You may be in a sector that has more government subsidy opportunities than others. The U.S. Small Business Administration (SBA) and other organizations help businesses get quicker access to grants and tax breaks.
Business Loans
Business loans can provide large sums of capital that you repay in manageable monthly installments. Lenders will look at your revenue, credit score, and other details to determine the loan amount and v. You can either choose a longer loan to minimize monthly payments or pick a loan with fewer years to get out of debt sooner. Business loans give you the capital you need without taking equity from your business.
