How to raise capital for your business
Before you go down the path of seeking capital from outside your business, identify any other ways of raising capital. For example, do you have any savings (either in the business or you personally) that you could use? If you have unused assets in the business (machinery that’s not used very often, buildings or excess stock you could quit), then weigh up the advantages of selling these first.
Once you have completed this exercise, determine how much you now need.
Equity capital and debt capital – the difference
The most common form of raising capital is with ‘Debt capital’. This is money you’ve borrowed, usually from your bank (or friends and colleagues). It could be short-term funding like an overdraft for extra stock, or longer-term loans for buying new equipment or a building.
Less common is ‘Equity capital’ where you raise cash in exchange for selling part of your business. In effect you give up some of the equity in your business for capital to help grow. More often than not, you need substantial amounts of capital to make it worth-while to the investor.
Most of us are familiar with borrowing money. The most popular sources are:
- Friends and family. Often a first option as they are easy to approach but do take care as owing money to people you know isn’t always a good idea.
- The bank. Do you have any spare equity in your house that you could use? This is one of the most used forms of raising capital for small businesses as it’s often the cheapest. Interest rates with a property as security is almost always cheaper than unsecured finance. You might also consider asset finance, where you borrow cash over the value of an asset, work in progress or stock.
Before you borrow any funds, double check that do you really need cash, or would you be better off looking at new markets working alongside a partner business?
If you require more capital than you can raise yourself or borrow, then you may wish to sell part of your business in return. The main providers are:
Angels are people (often other business owners) who think your business is promising and are willing to invest in it. They usually invest in businesses they’re familiar with, wanting either a return on their investment, some equity, or both.
The great thing about angel investors is that they’re usually keen to invest at an early stage, which can help with your start up. They bring their own experience to the table, which is knowledge you should take advantage of.
These are investment companies or fund managers who provide cash in return for part-ownership of your business. However, they’re typically looking to invest larger sums of money, which could be above and beyond what you need, and their requirements are much tougher than angel investors.
They may not want to play such an active role in the management of your business, but possibly a role on your board (so they tend to look at larger businesses).
Other forms of capital raising
It’s well worth checking out whether or not your business qualifies for government funding. Mostly, this type of funding comes in the form of grants.
At times large companies (it could be a customer or supplier of yours) invest in smaller businesses that they have a stake in seeing grow and expand.
Growing in popularity are online capital raising forums. They profile businesses seeking capital and then rely on the online investor network to raise the capital required.
Prepare your business for raising capital
Regardless of where you get the capital from, the more prepared you are the better.
These tips will help you present a strong business case to whoever you are talking to:
- Speak to advisors – your business banker, lawyer and accountant are all people you should consult about finding investors. They’ll have good contacts and advice.
- Prep your business – get your processes and systems running smoothly, make sure you’re monitoring your KPIs and demonstrate how you’re providing an excellent customer experience. Look for ways to work smarter, try and reduce overheads, and make sure all marketing is measured so you can continue with what works and ditch what doesn’t.
- Build your business case – review your business plan and make sure it’s presented well. Define your goals, how you’re going to achieve them, why you need capital and how much you need. Justify your reasons in terms of growth and expansion opportunities.
- Show you’re special – highlight what makes you stand out. So showcase your competitive advantage and point of difference. Demonstrate how you’ve protected your IP and if you can show that your business is scalable, so much the better.
- Explain your team – show that they’re experienced, skilled, and ready for the journey.
- Look for leverage – don’t grab at the first person to offer money. Make sure you’ve done your due diligence on all potential investors so you can decide which will work best with you and your business.
- Consider the risks – you are going to have to hand over some ownership if you decide on the equity option. Make sure you’re comfortable with this.