Every business needs capital to get started and to grow because a good idea is not enough to make a business successful if it doesn’t have the right financial backing. Yet it is often lack of money that prevents businesses with great ideas from succeeding. So every business owners needs to be financially savvy to give their fledgling business a head start.
So just what are the best ways to raise the capital to start up and grow your business?
There are, of course, the major banks but they are not always enthusiastic about lending to new businesses (in fact, rarely are). Fortunately banks are not the only source of business loans – there are many alternative funding options that are easier and cheaper for new businesses than a more traditional approach. Let’s have a look at 5 of them…
There are wealthy individuals – so-called “Angel Investors” – who will invest in new businesses in return for shares in the business or a proportion of the profits. The internet age has made it much easier to make contact with angel investors and you can track them down in sites such as ACE-Net, Angel Capital Association or The Funding Post amongst many others.
If you are prepared to give up a percentage of your business, an angel investment can be a quick and easy way to raise finance.
If you cannot raise the necessary cash for the business yourself then you can often secure a loan if someone else is prepared to act as a guarantor on the loan – to effectively guarantee loan repayments if you can’t make them. A guarantee can be provided by a family member or even by an angel investor who is not prepared to stump up the cash for al full investment but will guarantee the repayments.
In many ways a loan guaranteed by an angel investor is preferable as you won’t have to relinquish a share of the company.
In the same way that an angel investor would expect a share of the company equity so too would a venture capitalist. Venture capital is usually only appropriate for very large sums and for well-established businesses with a professional management team and a high-profit idea, looking to grow to the next level by developing new products or expanding existing services.
A professional business plan is essential to attract venture capital funding as is an experienced team – this is not for newbie entrepreneurs. But if you fit the bill you can find out more from the National Venture Capital Association and at The Funded website.
Crowdfunding is where a large number of people each invest small amounts of money to raise a large investment sum. This sounds easy but expect to put in a lot of effort to raise any serious amount of money through this method.
However, this has been a fast-growing way to raise cash for a business in recent years and is thought to contribute billions of dollars to small businesses each year across the globe. The benefit of crowd-funding from a business owner’s perspective is that there is no need to give away equity in the business. But naturally all these small investors will want something in return but it could be something as simple as your new product for free.
Borrowing for a business on credit cards may be risky but are often overlooked by budding entrepreneurs yet many now have interest-free credit deals for almost 4 years – yes that’s right almost 4 years. I can hardly believe it myself. Naturally, you would need an excellent credit score to obtain that sort of deal but even the less attractive deals for those without a perfect credit score can still give you 0% interest for a couple of years. If you do take this approach don’t forget the risks – mainly that the interest rate after the deal expires will be very high.
As a final word, before you start looking to borrow money make sure you have exhausted all options for government grants for your business. The financial blogger Amanda Gillam does a good summary of government funding options in her guide “7 Ways To Raise Business Funding and Finance” and you may be surprised at how much you are entitled to if you fulfil the criteria for government money.