How To Raise Capital For A Startup

How To Raise Capital For A Startup

Beginning a business is not very easy at all. Investors and entrepreneurs are often faced with several challenges before the business can pick. First, identifying a market need is very daunting as one will have to conduct extensive market research to find out what the market needs. You may then think that you have completed the difficult task, but you are just one step away. The next important thing you have to do is fund your business.

Approximately 94% of start-ups fail to pick, according to a recent study. The leading cause of this failure is the lack of proper funding. You must identify the different funding options available for you. You may then choose to use all the methods or select a few that work well for you in high capital collections and the cost of capital involved. Be sure to consider the pros and cons of each method to make an informed decision.

Capital is the blood flowing in the veins of the business as so without money, the business cannot thrive. The long, challenging business journey from idea generation to earning profits is fueled by cash or simply capital. The method of funding depends mainly on the type and nature of the business. Large firms will have different funding options from small businesses, especially sole proprietorships.

If you are at the stage of asking yourself how you will fund your business, below is a detailed guide of some of the methods you can use to acquire capital. The forms are discussed comprehensively to make your decision-making process easy. Read on to learn more about this methods.

Before you choose any of the methods for your funding, consider the following factors.

  • The nature and type of your business
  • The cost of financing
  • The requirements and compliances
  • Other pros and cons of the method

The methods can either be traditional or modern.

How To Raise Capital For A Startup

Traditional Methods

The methods mainly involve borrowings from banks, including loans, grants, microcredits, and other bank borrowings.

Loans from Banks

It involves looking for credit in a bank. It is a structured method of obtaining cash with many requirements involved. As an entrepreneur, you have to comply with all the requirements to get a bank loan. For example, the bank will consider your credit score, and if you have pending loans and other debts, you will not be granted the loan in most cases.

The bank will also require you to present your complete business plan, and if satisfied with your idea, they will grant you the loan; otherwise, you will not be given credit. Whether your business idea is good or not will be at the discretion of bank management. Most people do not prefer using this method because of the many legal and other requirements.

Other requirements include:

  • Most banks will expect you to atleast have an active account with them before loaning you.
  • The bank will require you to have a good credit score.
  • Most banks will prefer funding businesses that have been in operation for atleast a year to newly formed businesses.
  • The leasing agreements, among other requirements.

Government Loans and Grants

Most governments offer microcredit grants and loans to their entrepreneurs. It, therefore, depends wholly on your country of residence. It is possible to apply for such a grant, mainly if your business idea contributes to the country's economic development. This may be through revenue generation from taxes, the creation of employment opportunities to reduce the country's unemployment rate, and the production of goods and offering of services.

The US government, for example, has many programs under US Agency for International Development that you can apply for government loans. Such programs include Development Innovation Ventures, Corporation for National and Community Service, and National Telecommunications and Information Administration programs. Entrepreneurs in the Us can apply for government grants such as social innovation fund, Americorps, and many other funds.

Getting a government grant is also not that easy as you will have to fulfill some legal requirements specified by the federal, state, or county government.

Credit Cards

It is a prevalent and helpful method, especially for those who need the money immediately and fast. In this method, you are only required to have a credit card which you will use to buy goods and pay for the services you need to start your operations. Most entrepreneurs prefer this as the initial funding method s it does not involve many requirements like creditworthiness, presentation of your complete plans, and your ability to satisfy loaners.

However, we do not appreciate this method very much because of the too many interests involved. The technique is also not sufficient for starting a business, so banks have several credit programs for entrepreneurs.

Foundations

Some several not-for-profit foundations and organizations offer financial assistance to vibrant entrepreneurs. Such organizations provide capital to people, especially the minority groups in society, such as women, youths, and people with disabilities. Extensive research will give you information about such foundations in your country and what you need to get financial support.

Lending Companies

They are more modern and dynamic than banks. The advantage of using this method is that you are not required to fulfill many requirements. When sourcing for capital from such companies, you are only required to fill online registration forms, which is easy. Such companies provide funds to entrepreneurs to support their businesses or start-ups for successful project operations. It is only essential that you research such companies to identify the best in your country.

How To Raise Capital For A Startup

Modern Methods

These are capital sourcing methods other than bank loans. They include the following.

Partner Financing

In this method, you can get a partner with a business person of a bigger brand, preferably in the same industry, in exchange for some rights in your business. The partner will then help fund your business by selling some portion of ownership in the company. This method is not lending but more of the sale of the start-up shares.

You can also choose to partner with other people where you can pull your resources together. In this method, the two or more partners will each be required to contribute a certain amount of money, commonly known as partners' capital, to fund the project. The method allows quick and easy availability of capital, and through joint funding, you can be sure to accumulate a considerable amount of money.

Pros

  • Generates more cash through prospective partners, infusing their contribution into the business.
  • Cost-saving- This is because the burden of finances will e distributed equally among partners.
  • Connections-Prospective partners will have different connections in terms of investors hence more sources of funds.

Cons

  • Legal formalities-Formation of a partnership involves some legal formalities and requirements which may not be attractive to entrepreneurs.

Funding From Family and Friends

When they think of funding their projects, most people think the first option that clicks the mind is family and friends. It is a straightforward alternative for financing your business, and if this is your option, you are not the only one. Since they are people close to you, they will not hesitate to help you if they are in a position to do so. This is a viable option for funding your project, and according to the Global Entrepreneurship Monitor, about 5% of business owners started their projects with help from immediate people.

It is only vital that you identify people who have some business skills and narrow down your list to those who believe in you and see the potential for greatness in you. The friends and family you go for should have a clear understanding of risks, and they should know that significant risks are involved for outstanding excellence and success. You will also have to agree on the form of the funding, whether it's a loan that you will have to pay in the future or an equity financing where they will have a share in the ownership of the business.

Pros

  • It is less formal.
  • You are not required to fulfill many requirements.
  • They guarantee a good and beneficial treatment.
  • If they can help, it is straightforward and immediate.

Cons

  • Sometimes they may fail to believe in your dreams and your ability to succeed.
  • Some of them may not have the financial ability to fund you.
  • They may interfere with your ownership of the business.
  • They may fear the significant risks involved.

Angel Investors

These are people with significant financial abilities and interests in start-ups. They are accredited individuals with a net worth above $1 million or $200,000 annually. They may work individually or operate in groups with other angel investors to form a fund. Angel investors finance start-ups usually at the early stages through providing capital to entrepreneurs.

The screen and scrutinize business ideas and even provide advice relating to the project. For this reason, it is only essential that you check the viability of your business plan before handing it over to the angel investor for scrutiny. They will have to be convinced with your business plan before they can fund you. They are a good source of capital for your capital as they have funded prominent companies such as Alibaba, Google, and Yahoo.

Pros

  • Alongside financial assistance, they offer mentorship and advice to entrepreneurs.
  • Angel investors believe that there will always be significant risks for high returns, and therefore, they are not afraid of risks.

Cons

  • Compared to venture capitalists, they provide less capital to entrepreneurs.
  • It may not be straightforward to find an angel investor.
  • They will have to be satisfied with your business project because you can receive funding from them.

If you are wondering where you can find angel investors, worry less. There are several resources platforms and websites where you can find them, such as Angel Capital Association. You only have to conduct due diligence.

Crowd Funding Campaign

Currently, this new method has been gaining more popularity in funding start-ups. Many successful businesses attribute their growth to this kind of funding, and you can be one of them, of course, with the right pitch and product. Crowdfunding involves taking contributions, loans, pre-order, or contributions from different people at the same time.

The method is all about telling your business story to people who can turn your business idea into a reality. Due to modern technology, you can be able to share your vision or financial challenges on platforms to the community or investors who will, in turn, come out to assist. The method is straightforward.

All you need to do is echo out the comprehensive plan of your idea, and the crowd funders will then share it on some specific platforms. You will have to talk about a detailed analysis of your business in terms of:

  • The business goals
  • How much do you need to fund your project
  • Expected profit margin and how you expect to earn the profit
  • Scheduled payback period and rate of return

Those investors who will love your story will then make pledges and promise to support your idea through different methods like providing loans, contributions, donations, and other forms of financial assistance.

Pros

  • Through crowdfunding, you have the opportunity to create public interest for your business.
  • It is a form of marketing and advertisement other than just sourcing for capital.
  • As the business progresses, there is a high chance of obtaining venture capital investors.
  • High potential of acquiring more funds.

Cons

  • It may be difficult to obtain financial assistance because of the stiff competition, especially if you have the same story as someone else.
  • There is a probability of your idea being rejected or overlooked by potential helpers if your business idea is not that solid.
  • You have to convince investors, and your story must be attractive enough to get financial help.

Bootstrapping

Also referred to as self-funding, this is a pervasive and feasible way of funding your start-up as long as it operates in industries like manufacturing and transportation where more heavy capital is required. The methods involve getting funds to finance your project from personal savings or even family and friends.

This method is critical and should always be considered as the first or initial source of capital. Before self-funding your business, it is essential to make sure you have saved up enough finances, which are, of course, readily available. This funding method is critical for attracting external investors to fund your project. It is straightforward to invest your savings in your business if you believe in your vision and you do not accept failure as an option.

Pros

  • Easy accessibility of funds.
  • Little or no requirements, compliances, and formalities.
  • Less and flexible costs of raising capital.

Cons

  • The method does not work for large projects requiring heavy capital outlay. It can only support small business ventures.

Venture Capital Investors

These are funds managed by professionals who are very keen and interested in business projects with high potentials. The method involves betting big. Before funding you, the professionals will scrutinize your business plan to first establish its economic viability and potential in terms of many factors such as:

  • Rate of return
  • Payback period
  • Profit margin and many other factors

In exchange for their capital, the investors will obtain ownership in the business investment against equity. The investors offer not only financial assistance but also mentorship, decision-making, and business management. This funding option is primarily helpful for businesses beyond the start-up phase.

Pros

  • To ensure the sustainability and growth of their investments, the venture capitals continuously monitor the business and its operation. By so doing, they promote the growth of your business.
  • Their business expertise and mentorship, together with their contribution to the management of the business, promote business growth.

Cons

  • Until they have recovered their initial investments, the venture capitals will remain loyal to your business, after which their loyalty may cease.
  • This method involves surrendering a large part of your business to the investors, and hence you may lose control of the company to them.
  • Investors mainly look for large businesses that have been operational for some time other than start-ups. This is because they believe such a company has got a proven level of sustainability and potential.

Business Accelerators and Incubators

If you plan to actualize your business option and have enough capital, you can consider this option. The method has assisted many prosperous businesses today and is an excellent option for funding your start-up. Though used interchangeably, incubators and accelerators have some slight differences.

Incubators provide finances to start-ups to help nurture them by providing all the requirements for the business topic. Accelerators, on the other hand, help assist and promote and fast-track business. They ensure that the company grows to become more successful.

Pros

  • As a business owner, you will receive mentorship and advice from taking your business a notch higher.
  • There are opportunities to connect with other start-ups.
  • Your start-up will be nurtured at all growth stags for sustainability.

Cons

  • During the early growth stages, the business may downsize other than grow if there is no commitment.
  • Competition for such investors is very stiff.
  • Involve some requirements and compliances.
  • You will be required to have a sound and solid business plan that attracts investors.

Conclusion

There are many funding options for start-ups, and it is only essential that you are most suitable in your case. You will also have to conduct due diligence about each opportunity and do comprehensive research to complete each option. Consider every factor of each funding option having the nature and type of your business in mind. Do not let your business dream remain a dream simply because you lack capital.

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