How to Raise Money to Start a Business – 4 Methods

How to Raise Money to Start a Business

Most companies start life funded by their founders, perhaps with a modest startup loan from a bank. The tales of vast investment from angel investors or venture capital firms are a million miles away for most modest businesses getting off the ground.

With more companies launching than ever before, there is also more competition for whatever funds are available. However, there are still plenty of ways to raise some extra capital that can get your business off to a flying start.

Crowdfunding is the new way forward

Since the launch of Kickstarter in 2009, many business ideas have found direct backing from online investors and customers, even if the product is just at the design stage. Since then, plenty of other platforms, both global and local have started up to help clever ideas find funding.

Your idea doesn’t have to be a smart home gadget or massive online game, which represent the major success stories for crowdfunding, but generally an end product is required to get people investing, so services are a harder proposition to sell. Whatever the idea, it needs to be clearly explained, the benefits highlighted and the crowdfunding campaign meticulously planned.

Pros

Simple ideas are winners. If you’ve thought of a way to make people’s lives or hobbies better, you will find a receptive audience willing to invest.

Crowdfunding is huge with an estimated $93 billion by 2025 being invested in ideas. Much of that will go to big projects and serial entrepreneurs who know the crowdfunding ropes. However, there is always room for a small business with the right idea.

Once you have a successful project funded and delivered, it is easier to go back to the market as your business will have gained trust and a reputation.

Cons

There is a lot of work involved in making a crowdfunding project successful. It is never an easy option. And with the success comes lots of competition, meaning many perfectly viable ideas can be overlooked.

Crowdfunding exposes your idea to a wide audience, and there may be others who will try to copy your idea or launch a similar campaign with extra added-value, complicating your efforts.

Grants and Loans the Traditional Way

Grants from local business partners, charities, government departments and other avenues are a small niche that can help a business get off the ground. Usually offered to young business starters, or companies focused on a particular market, competition is tough for grants, but the winners will have proven that their idea has merit. That may help them find further funding sources beyond the value of the actual grant.

Loans from traditional banks rely on good personal credit scores of the company directors, a firm business plan and proven or strong predicted revenues. Beyond the banks, companies like Lending Club, offer small business loans to companies that have started up in business (minimum of two years) and need funding for expansion or other needs.

grants and loans

Pros

Bank and other loans are a solid, dependable and long-term form of financing. Most major businesses have some form of revolving credit facility to help them grow. They are not considered a weakness, but an asset to the business and will improve the company’s credit history, if paid up on time.

Cons

Loans and grants can be hard to get from traditional sources for young businesses. Don’t rely on them in your business plan, and be prepared to look for alternatives.

Alternate Forms of Financing

Cashflow can cripple almost any business, but there are plenty of ways to borrow based on money you know is coming in. For example, Invoice Financing allows the business to release the revenue from your invoices before they are paid, for a small service or interest fee. Other versions of financing allow companies to borrow against property or equipment they own.

Pros

For a fast-growing company with lots of invoices outstanding, this can be a valuable source of income. Invoice Financing companies will even chase up the outstanding invoices for you, helping reduce the amount you pay.

Cons

If you have a lot of invoices with one client who stops paying or goes out of business, you could be left owing more than you are bringing in.

The Bank of Family and Friends

The digital age sees families connected more than ever, however far they have spread. And they can often be connected to good-to-know people in many lines of work. This can be a useful way of finding relatives, or people someone in the family knows, who may be able to invest in a project or business.

Being online creates an instant impression of the business that can reach around the world, and it only takes one family member to share a promising idea that can go viral among those with the funds to invest.

Pros

People with a personal investment in a project are more likely to offer low rates or provide wider advice and other sources of investment in a good plan.

Cons

There is no guarantee of investment, even if a string of lottery winners is hiding in your family tree.

The power of Angel Investors

With most capital investment focused on specific vertical markets or tech industries, there are still plenty of angel investors who invest in local businesses or pre-seeding early stage businesses.

Finding these angels is a little tougher than going on a TV show, but searching with local business groups is one way to start. Some businesses are forming to focus on this area and to mentor the young business and its leaders to success.

Pros

A good angel is hard to find, but worth their weight in gold to any startup. Beyond money, their advice, contacts and knowledge can be invaluable.

Cons

Teams or businesses built up in the heat of a startup culture are quick to grow and just as fast to fall apart, with lots of outside influence. These types of business are higher risk than an organically grown business.

Most companies require more finance, and there are many ways of finding it. But, finding the right funding for your company requires clear planning. Perhaps applying for every type and only choosing the right one for your business.


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