How to Raise Capital for Your Startup And Small Business Growth

One of the biggest challenges entrepreneurs face is raising money for business ideas or growth. That’s why 94% of new businesses, according to a recent study, fail during their first year of operation. Unless you are independently wealthy, you’re going to need a helping hand.

Last week, on SuccessDigest Marketplace Advertisers’ Catalog, we started with the series, “Overcoming the Small Business Challenge” and we talked about How to Hire a Good Employee and Retain Them Long-Term. If you missed that edition of the advertisers’ catalog please send us an email and we will send it to you.

Today, we’ll be looking at overcoming another major small business challenge – How to raise funds for your small business…

Money is the bloodline of any business. The long painstaking yet exciting journey from the idea to revenue generating business needs a fuel called capital. That’s why, at almost all the stages of the business, entrepreneurs find themselves asking – How do I finance my business?

Now, when your business would require funding depends largely on the nature and type of the business. But once you have realized the need for fund raising and you are wondering how or where to start, below are some of the different business fundraising channels you can take advantage of.

1. Crowdfunding

Crowdfunding is one of the newer ways of funding a startup that has been gaining lot of popularity lately. It’s like taking a loan, contribution or investments from more than one person at the same time.

Like other organizations, small businesses can use crowdfunding to raise capital for their venture. When we define crowdfunding in business, we mostly think about startups. Crowdfunding for business presents a great opportunity for startups to source a large group of investors efficiently.

It is also primarily done online, whereas other forms of financing mostly occur offline.

Here’s how crowdfunding works – You, an entrepreneur, will put up a detailed description of your business on a crowdfunding platform. You will mention the goals of your business, plans for making a profit, how much funding you need and for what reasons, etc. and then consumers can read about the business and give money if they like the idea. Those giving money will make online pledges with the promise of pre-buying the product or giving a donation. Anyone can contribute money toward helping your business if they really believe in it.

The best thing about crowd funding is that it can also generate interest and hence helps in marketing the product alongside financing. It is also a bonus if you are not sure there will be any demand for the product you are working on.

However, keep in mind that crowdfunding is a competitive place to earn funding, so unless your business is absolutely rock-solid and can gain the attention of the average consumers through just a description and some images online, you may not find crowdfunding to work for you in the end.

If you are a small business owner who has strong convictions about an idea, or you need to raise money to overcome a personal challenge, use the power of the internet to raise the funds you need.

Moreover, you can ask friends and family to contribute to your crowdfunding efforts or borrow from them directly. People you know are often the best and safest way to raise money. Not only will they be more open to your proposal, but they have also likely seen your effort and dedication.

2. Angel Investors

An Angel investor (also known as a private investor, seed investor or angel funder) is a high-net-worth individual who provides financial backing for small startups or entrepreneurs, typically in exchange for ownership equity in the company. Many of the biggest companies today, like Google and Yahoo, were funded by “angels.” If you are looking for a way to raise money for a business that already shows signs of growth, Angel Investors are a favorable option.

Often, angel investors are found among an entrepreneur’s family and friends. The funds that angel investors provide may be a one-time investment to help the business get off the ground or an ongoing injection to support and carry the company through its difficult early stages.

They also work in groups of networks to collectively screen the proposals before investing.

Another benefit of raising money for business through angel investors is that they are more willing to offer mentorship than straight investors or venture capital groups.

This alternative form of investing generally occurs in a company’s early stages of growth, with investors expecting up to a 30% equity. They prefer to take more risks in investment for higher returns.

3. Product Pre-Sale

Offering pre-orders ahead of your scheduled rollout date is a great way to gauge consumer demand and raise money for business at the same time.

Selling your products before they launch is an often-overlooked and highly effective way to raise the money needed for financing your business. It’s a great way to improve cash flow and prepare yourself for the consumer demand.

A well-run pre-sale can provide the much-needed funds to finance your business in the early stages of development. Not only does this raise the money needed to fulfill these orders, it also offers you a way to gauge the demand of your product.

4. Strategic Partners

If you have a relationship with a supplier, distributor, or even a customer who can benefit from your product or service, it doesn’t hurt to ask them to get involved.

Help them see what they can gain by partnering with your startup, and they may be willing to cut costs, provide you with services, or invest directly in your budding business.

There are also some individuals who have the cash, but may not have the time, ideas, knowledge, or skills that are required to start or build a good business.

These people may have other full-time commitment (like a job), or may not have the risk appetite or interest to actively build a business.

This creates an opportunity for a win-win partnership with you. Learn to take advantage of this and make the best use of it. Pastor Dr. Emmanuel Sunny Ojeagbase, treats this topic comprehensively in our $1 Information Marketing Course.

5. Venture Capital

If you need large amounts of money quickly, venture capital investors may be just what you’re looking for. Keep in mind that those investors will be with you until they recoup their costs (and profits) and they may demand a short payback time frame (e.g., three to five years).

Venture capitals are professionally managed funds who invest in companies that have huge potential. They usually invest in a business against equity and exit when there is an IPO or an acquisition. They provide expertise, mentorship and act as a litmus test of where the organisation is going, evaluating the business from the sustainability and scalability point of view.

A venture capital investment may be appropriate for small businesses that are beyond the startup phase and already generating revenues.

However, there are a few downsides to Venture Capitalists as a funding option. They have a short leash when it comes to company loyalty and often look to recover their investment within a three-to-five-year time window. If you have a product that is taking longer than that to get to market, then venture-capital investors may not be very interested in you.

6. Bank Loans

If you’ve got a solid business plan, profit forecast, and estimated time to maturity, you might be able to raise money for business with your local bank. You will have to provide collateral against the loan, but if you’ve got a good relationship with the banks in your area, this can be a relatively simple way to secure funding quickly.

Banks make money by lending money. If a bank doesn’t give out its money, it can’t make more money.

But banks just don’t lend money to anyone. So, if you are not getting the loan you requested from the bank, it’s because you haven’t met the requirements.

Most banks are typically conservative and don’t want to lose their money. That’s why they only give money to people and businesses that meet their criteria.

To get a loan from a bank, you must understand how banking works and how to entice them to give you capital.

There are several strategies you can use, and one of them is to get a credible backer first before you approach the bank.

If you are interested in learning how to develop loan proposals and applications to banks in a way that addresses most of the critical risks that typically hold back banks from releasing funds to entrepreneurs, send an email to us at [email protected].

7. Government Programs

Government programs are another channel worth investigating if you’re looking to raise money for business. These programs move slower than other options on this list, but the funding they provide can be substantial and very convenient.

Many people don’t know this, but there are several government schemes, initiatives, and organisations that provide grants, subsidies, and low-interest loans for all kinds of businesses.

These funds are typically used by government to stimulate and encourage entrepreneurship, investment, innovation, research, and economic growth in a particular industry or geographical area.

There are funding schemes for agribusinesses in Nigeria that provides low-interest loans to farmers who cultivate certain crops.

There are also several Special Economic Zones (SEZs) across the world that provide incentives like waivers, tax holidays, grants and subsidies that could ultimately save you capital as you start and grow your company.

Sadly, many entrepreneurs lack the knowledge and skills required to target and benefit from business grants, subsidies, and low-interest loans.

In our coming article on SuccessDigest Marketplace Advertisers’ Catalog, you will learn how to identify, target and apply for government funding opportunities and improve your chances of raising the funds you need to start or grow your business.

As we have seen, today’s businesses have so many different funding options. There are crowd funding, angel investors, venture capitalists, bank loans, government programmes, and the list goes on. But all of those funding opportunities can’t help you if you haven’t built a self-sustaining business.

So what happen when all this funding stops?

In most cases, the businesses burn through their remaining cash and then fail.

To avoid all of this, you have to work harder to build self-sustaining business instead of just more fundraising. This may sound obvious, but shifting from fundraising to business building is a question of focus and consistency.