Do you need to raise capital for your business? Are you not sure where to start? Don't worry, you're not alone. Raising capital can be a daunting task, but it's not impossible.
In this guide, we will walk you through the process step-by-step and show you how to get the money you need to grow your business. So, let's get started!
What does it mean to raise capital?
Rasing capital means that the business gets cash, to fund its operations. When a business needs money to grow, it can raise capital in several ways. It can borrow money from a bank or other lending institution, issue new shares of stock to investors, or receive an investment from a venture capitalist. In some cases, the business may also be able to get a loan from the government.
Each method of raising capital has its advantages and disadvantages. For example, a business can raise capital by borrowing money from a bank or other lending institution.
However, it may have to pay interest on the loan and must repay the funds eventually. The most common way of raising capital is selling equity in exchange for funding (i.e., equity financing).
For example, you might raise capital by selling shares of your company's stock to investors or venture capitalists. This complete guide will go into more detail about the exact ways to raise capital and the pros and cons of doing so.
Why do companies and startups raise capital?
There are a few primary reasons why companies and startups raise capital. The first reason is to grow the company. Companies need money to invest in their business. A company raises capital to hire more employees and build their team, move to a new office location, purchase equipment for the office or new technology, build a new office space, or develop and launch a new product.
The second reason is to expand the business. Companies raise money to expand their business into new markets, launch new products or services, and acquire other businesses.
The third reason is to fuel operations. A company may need to raise money to cover the costs of day-to-day operations such as rent, salaries, and utilities.
The fourth reason is to survive. A company may need to raise money in order to pay off debts, cover the costs of a lawsuit, or avoid bankruptcy.
The fifth reason is to raise money for a startup company. A new business may raise capital to create the initial product, cover the costs of marketing and advertising, or establish a presence in the market. Each reason for raising capital has its own unique set of challenges and considerations.
A company must carefully weigh the pros and cons of each option before deciding whether or not to raise money. This guide will go into more detail about the benefits and disadvantages below, but first, here's a list of potential paths you can take to raise capital.
How to raise capital for a business
Businesses that are established and well-known may experience different methods of raising money than startups because they are often seen as less risky by investors.
These are the most common ways a business will raise capital:
- Internal sources like retained earnings
- Borrowing money from a financial institution, such as a bank
- Selling equity to raise capital from external investors
- Government grants and subsidies
- Issuing debt or selling assets
- Trade credit from suppliers
Retained earnings
When a company makes money and keeps it, this is known as retained earnings. Retained earnings are the amount of net income that was not paid out as dividends to shareholders.
Debt financing
When a company raises money through debt financings, such as bank loans or credit lines, it pays interest on the money. Debt can raise a company’s cash flow and help it grow. Too much debt can also make a business fail.
Selling equity
When a company raises money by selling shares of ownership, it is called equity financing. This can raise capital quickly but also carries the risk that shareholders might see their ownership diluted.
Government Grants and Subsidies
When a government provides money to support an organization or business, it is called a grant. The government may also offer tax breaks or other incentives for businesses that meet certain criteria, such as creating jobs or investing in certain areas.
Asset Sale
When a company sells assets, such as property or equipment, it is called an asset sale. This can be a good way to raise capital without borrowing money.
Trade Credit
When companies purchase goods and services from suppliers, they may be offered payment terms, such as 30 days from the date of invoice. This is called trade credit. Suppliers will often extend this type of credit to businesses that have a good credit history.
How to raise capital for a startup
Startups differ from businesses because they are looking to disrupt a market and scale fast before potential competitors beat them to it.
Here are the most effective methods for an early-stage startup to raise capital:
- Equity crowdfunding: FrontFundr and StartEngine etc.
- Community crowdsourcing: Gofundme and Indiegogo.
- Pitching investors at conferences and meetups.
- Angel investors, venture capitalists, and incubators (e.g., Y Combinator).
- Selling products and services to customers.
- Bootstrapping (sweat equity), or using personal savings and income to finance the business.
Raising capital is one of the hardest parts of being an entrepreneur. It takes a lot of time and energy to raise money, so it's important to make sure you're doing it the right way.
There are a few different ways to raise capital, and each one has its advantages and disadvantages. The most common ways to raise money are through angel investors, venture capitalists, and crowdsourcing.
Angel investors are individuals or groups of people who invest their own money in startups. They usually have a lot of experience in business and are looking to make a return on their investment.
Venture capitalists are companies that raise money from other investors to invest in startups. They tend to be less risk-averse than angel investors and are looking for companies that have the potential to grow quickly.
An incubator is a company or organization that helps startups grow and succeed. They provide funding, mentorship, and office space to their members. Incubators are a great way for startups to raise capital without having to raise money from outside investors.
Crowdsourcing involves soliciting donations from a large number of people. This can be done through platforms like Kickstarter or Indiegogo, or through social media like Twitter or Facebook.
This lets businesses raise money from ordinary people, usually via online platforms, without having to give up equity or repay any loans. Instead, crowdfunding typically involves pre-selling products at a discount to raise capital in advance of manufacturing them.
This can be an attractive option for businesses that have a product or service ready to go to market but need money to cover the costs of production and marketing.
Crowdfunding (equity) is a newer way to raise money, and it is similar to crowdsourcing, except it gives up equity, usually in shares, and opens the door to retail investors. This can help gain a new audience of smaller investors and allows participants to be a part of the startup without being an accredited investor.
Entrepreneurs can raise capital with a combination of these methods, but each one has its advantages and disadvantages. So, which one is right for you?
Meeting with the angels
To raise money from angel investors, you need to have a good idea, a well-written business plan, and a good pitch. You also need to be able to convince them that you can make money from your idea without spending any of their own money.
Starting a profitable venture
To raise capital from venture capitalists, you need to be able to pitch your idea. In a way that makes them want to invest in it. You also need to be able to raise money from other investors, like angel investors or crowdfunding platforms. So that you can show them that you have a solid business plan.
Support from the community
To raise money through crowdsourcing, you need to have a good idea and a well-written business plan. It is easier to raise money with crowdfunding if you already raised capital from prominent investors. Because it can also help prove to the crowdsourcing community that professionals are interested.
This can help create the social proof you need to get more potential retail investors on board with your startup. These advocates can become a dedicated community that will help spread word-of-mouth of your startup through their excitement of involvement.
What is the cheapest way to raise capital?
There is no one-size-fits-all answer to this question, as the cheapest way to raise capital will vary depending on the specific situation and the type of business.
However, some common methods for raising capital include low-interest rate loans, crowdsourcing, seeking angel investors or venture capitalists, or applying for government grants or loans.
Both businesses and startups need to consider the expense of their capital and decide if the cost of raising the capital is worth it in the long term.
Raising capital through work ethic
Sweat equity or bootstrapping are common terms used to describe an entrepreneur that puts in a lot of effort to raise capital. For example, if someone has worked hard at his job for many years and saved up money to invest in a business.
This can be a long and exhausting process that is difficult to scale efficiently. It could be avoided with the methods of raising money mentioned in this article.
If saving money from a salary isn't a viable option, an entrepreneur without connections to others with capital to invest will still need to network with effort. They also need to learn how to sell their idea or business to potential investors.
Advantages of raising capital
Raising capital can help you grow and scale your company. It allows you to raise a large amount of money in one shot. This can be an advantage if you have a big project that needs funding or needs to cover a lot of costs quickly.
Raising capital gives your company a competitive edge. By allowing the development team to move forward with bringing a potentially disruptive and profitable product to the market. It can help you establish a competitive advantage.
When you raise money through equity financing, you can give up a percentage of your company to the investors. This can help you attract new talent, get access to new technology, or gain a larger market share.
Raising can help you survive tough times. If a company is facing difficult financial times, it may need to raise money to pay off its debts or cover the costs of a lawsuit. Having access to capital can save your business in the short term and even establish long-term success. With this being said, there are some disadvantages to raising capital.
Disadvantages of raising capital
The main disadvantage of raising capital is that it can dilute the ownership and voting power of existing shareholders. For example, if the business raises capital by issuing new shares, then the existing shareholders will own a smaller percentage of the company.
This can be especially problematic for founders who wish to retain voting control of the company. The business is giving up a piece of ownership and control in exchange for the money it raises. As an owner of the company, you might not be in charge anymore. The new shareholders will have influence over every decision concerning the business.
In addition, there may be restrictions on what the company can do with the money it raises (e.g., it can't buy back its shares). This is important to consider if you are an entrepreneur looking to maintain as much equity in your business as possible.
Raising capital isn't for everyone
No matter how much money you raise, it's important to use your capital wisely. Some methods of raising capital can be extremely stressful. If you do not have what it takes to handle capital effectively, it can be detrimental to your reputation as an entrepreneur and emotionally cripple you.
Starting or operating a business is a lot of responsibility. This is especially true when others have trusted you with their money. You want to make sure that all participants understand what they are investing in, without giving up too much information to competitors.
Important information to consider before raising capital
After you've selected the best path to take when raising capital as a business or startup, you must understand the legal requirements of each process. You don't want to make the mistake of raising capital at the cost of your brand image or face potential lawsuits.
The investors placing their capital into your business expects a positive ROI (return on investment). They do not want to be let down by finding out the capital was spent poorly. You must raise capital for the right reasons and not just to raise money.
You must raise enough capital so that your business can survive and thrive in the long term. If you raise capital without a clear plan or purpose, it may not be enough to meet your needs. If you raise too much capital, your business could suffer from overcapitalization.
Too much debt without assets makes your business potentially less desirable and if you do not have a strong balance sheet, it can be a signal of your businesses' poor financial health. Raising capital can raise questions for your business.
You must raise enough money to meet short-term needs, but not so much that it will raise questions about the long-term viability of your company. You must raise enough capital so that you can grow but not so much that you will have to give up too much equity or control of your company.
Conclusion
No matter how you raise capital, always remember that the money you raise should help your business grow. Don't raise capital just because it's available or easy to raise - raise capital for a specific purpose, raise only what you need, and raise enough money to sustain your business in the long term.
Weighing the risk and reward while balancing the financials and ensuring everyone is happy is no easy task. However, this guide should help you to navigate the world of raising capital. Make sure to bookmark and save this article on your browser and return it if you need a reminder on any information about raising capital.