Raising capital for small business expenses is not the easiest step of starting a small business but it is necessary. One major reason why small businesses fail is because the owner lacked necessary funds. Money is needed for equipment, property and more essentials for your small business. You may wonder how you can raise the money needed to start your small business.
There are two major sources of funding you can seek for your business: Equity VS Debt Financing. Below there are listed various methods of raising capital for a small business including forms of equity and debt financing. Analyze each option below and determine which method/ methods is better suited for your particular small business.
9 Ways of Raising Capital
1. Saving up your own money- When starting a small business you may not have all the money needed for start up costs; however you should have some money saved up for the purpose of starting your business. Bank lenders in particular are more suspicious of entrepreneurs who don’t invest in their own business. As a result they can decline a loan because of your lack of investment.
2. Borrow from Friends and Family- I know raising capital for small business expenses by asking friends and family for money isn’t fun, but hopefully you can win them over with your great business idea. To avoid complications in the future make sure to have a written agreement stating terms and details of the loan. You wouldn’t want to fight with loved ones over money. Be sure to present your proposition in a professional manner. Show them your business plan, explain to them why they should invest in you, and answer all their questions. If someone is giving you money for your business as a gift, be sure you obtain a letter from them stating the amount of money and that it was a gift. This is precaution to avoid future complications and misunderstandings.
3. Getting a small business loan- When raising capital for small business expenses many entrepreneurs go this route. However before attaining a loan you should be aware that there are many factors associated with business loans such as interest rates, late charges and collateral. Local community banks are often a great place to obtain a business loan. Click here for SME Loans and other Fund sources here.
4. Find a business partner and use their funds- Another way of raising capital for small business expenses is to develop a business partnership with someone who can invest in your business. Make sure to present them with a persuasive explanation for why they should join forces with you.
5. Incorporating your small business- Many entrepreneurs decide to incorporate their businesses for the purpose of raising capital for small business expenses. When you incorporate your small business, you will be able to sell shares of stocks. However when you sell shares of stocks you will also be selling a percentage of the ownership over the business. So if you sell 50% of your corporation’s shares of stocks you are selling 50% of the business ownership.
6. Finding a venture capitalist- Venture Capitalists are professionals who invest in businesses that show a high growth potential. Not only do venture capitalists provide funding for their clients by investing in their business but they also provide valuable business advice and strategies. If a venture capitalist decides to invest in your business it demonstrates to others that they viewed your chances of success to be favorable. However once a venture capitalist decides to invest in your business they often have a say on how it should be run. Since venture capitalists invest in businesses that demonstrate very high and fast growth rates, many small businesses do not meet the criteria.
7. Small Business Investment Companies- Small Business investment companies are venture capitalists targeted for small businesses. They are partnered with the government and provide small businesses with funding in exchange for a percentage of ownership in the business.
8. Angel investors- Finding an angel investor is another way of raising capital for small business expenses. Angel investors are simply private investors who invest money in your business with the belief and hope that in a couple of years they will see a higher return on their investment. After a 5 year period an angel investor may expect a return of at least double their initial investment. Of course starting a small business is risky business so the angel investor may not see any return if your small business fails. Naturally an angel investor will want guaranteed exit provisions in the case that your small business fails. You can find an angel investor by networking with other business owners and small business professionals. You can also subscribe to angel network firms that can match you with an angel investor.
9. Credit Cards – Many small businesses have turned to credit cards in order to pay their small business expenses. Credit Cards may seem like a quick fix but make sure the terms and interest rates are reasonable.
Wait Before you go…
Before raising capital for small business expenses it is important that you first determine how much capital you need for your small business. Create a business budget. Take in consideration that entrepreneurs often underestimate how much money is needed to run a small business and fail to expect the unexpected. For example what if your equipment gets damaged and you need replacements…do you have a back up plan? That is why it is a good idea to always have extra money put aside just in case.
Source: starting-a-small business.com. Sept 2009.