The foundation of any successful business lies in its ability to secure adequate financing.
This particularly true at the beginning, when you start with little or no business experience and have not demonstrated an ability to make money.
In this article, we explore the various means available to raise capital for your business.
1. Sweat Equity
Many businesses begin with founders who have the skills to run their business as “one-man-shows,” long before the business is able to hire staff and expand operations. This approach leverages your expertise instead of financial capital.
For example, when someone trained in software engineering can build an application prototype from the comfort of their home and present it to potential customers.
If you are cash-strapped but possess the skills needed to start your business, sweat equity is a powerful way to launch your venture. It enables you to contribute your labour, skill, and time, as opposed to cash, towards the start and growth of your business.
2. Personal Savings
Nothing beats the founder’s own resources when starting a business. Before you start looking for investors or consider borrowing, you need to assess your own resources and determine how much you are willing to commit to the business.
The more of your own money you invest in the business, the easier it will be to attract investors and lenders. Investors and lenders are more comfortable working with entrepreneurs who are invested in their business and literally have “skin in the game.”
3. Friends And Family
The advantage of borrowing from friends and family is that they will often provide capital on terms that you are not likely to get elsewhere.
Friends and family can give you money based on goodwill, without demanding interest or security, and will typically show understanding if the business goes through rough patches or fails.
For friends and family, the profit motive is secondary. Their primary desire for putting money in your business is to support you and help you succeed, not because they necessarily expect significant financial returns.
Best Practices When Taking Money from Friends and Family:
- Document everything clearly in writing
- Set realistic expectations about returns and timelines
- Maintain transparent communication about business progress
- Consider the relationship implications if the business fails
- Treat their investment with the same respect you would give a professional investor
4. External Investors
If you cannot raise sufficient funding on your own, you should consider bringing in investors who will put money in the business in exchange for shareholding.
An investor shares in the profits or losses of the business. Thus, an investor may demand a say in the running of the business. The choice of an investor goes beyond simply seeking to acquire investable funds. You should also consider the expertise and guidance that the business needs to succeed, and how potential investors can add value beyond bringing money.
Be scrupulous in your search for investors by paying special attention to how well you know them, the expectations they have for you, and how involved they want to be in the business.
5. Angel Investors
Angel investors are typically wealthy individuals who provide capital for startups, usually in exchange for ownership equity or convertible debt. They are willing to fund small operations and offer more flexible terms, besides contributing their experience and relationships.
Potential angel investors can be accessed through introductions from other start-up founders, live pitch events and startup competitions, online platforms dedicated to connecting entrepreneurs with investors and industry networking events
A list of potential angel investors for your business can be found here
6. Venture Capitalists
Venture capitalists are the guardian angels of entrepreneurs in search of substantial funds for their businesses. They are reputed to carry the biggest cheque books and possess a huge appetite for risking money to fund new businesses in the hope of reaping rich rewards in case of success.
Venture capital firms typically invest in businesses that:
- Have high growth potential
- Address large markets
- Show traction or proof of concept
- Have an experienced management team
- Offer the possibility of significant returns (10x or more)
7. Bank Loans
Commercial banks are often the most unlikely sources of capital for start-ups and small businesses due to their risk-averse nature and collateral requirements. However, as your business gains traction, it could be in a position to access business loans.
If you have a good relationship with your bank, you may be able to convince your bank manager to give you a loan to grow your business. To improve your chances of success in getting a bank loan, you will need to maintain excellent personal and business credit scores, prepare a detailed business plan and financial projections, identify suitable collateral if required.
8. Government and Nonprofit Support
This includes grants, which are free and given by non-profit organisations, or funds from development finance institutions which are disbursed on concessionary terms to entrepreneurs who meet specified criteria.
These funds can come in form of business grants, subsidised loans, business incubation programmes.
Action Steps
The funding path you choose should align with your business goals, growth timeline, and how much control you’re willing to relinquish. Many successful businesses use a combination of funding sources at different stages of their development.
If you need help connecting with investors and raising capital for your business. Contact us today!
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