Want to know the best ways a company can raise capital?
Raising capital for a start-up business isn’t always a piece of cake. Capitals are raised either to start up a business or expand.
The scope of this write-up will cover the major ways companies raise capital and how you can raise enough capital to start up your business.
Why Is Raising Capital Important
The importance of raising capital cannot be over-emphasized. Raising capital is a critical activity for many businesses seeking long-term stability and success.
While the specific goals and context of each business vary greatly, the overall goal is clear: funding can help an organization secure opportunities for development, growth, and continued relevance in the future.
Raising funds is essential for any business from its inception to its growth stage. However, the funding players shift from your friends and family to savvy angel investors and institutional investors who will require a sophisticated proposal that includes factors such as management experience, financials, and a profit plan.
What Are the Sources of Capital?
There are three major sources of capital available to companies.
Company Retained Earnings
Companies exist to profit by selling a product or service for more than it costs to produce.
This is the most basic source of funds for any business, and it should be the primary method of bringing money into the company.
Retained earnings are the net earnings that remain after deducting expenses and obligations (RE).
Debt financing, also known as debt raising, occurs when a business borrows money and agrees to repay it later. This is frequently accomplished through a loan, but not always.
Another option is to sell corporate “bonds” to investors that mature after a set period of time. The company must pay interest payments on the bonds to the investors before they mature.
A company can also raise capital by selling ownership stakes in the form of shares to stockholders. This is referred to as equity funding. Private corporations can raise capital by selling equity to family and friends or by going public via an initial public offering (IPO).
How Can a Private Company Raise Capital
Perhaps your company is in its startup phase. You may be wondering about the best ways with which your company can raise capital for growth.
Here are our suggestions on the best ways you can raise money for your startup private company;
When a company has a track record of earning significant revenues, and even better, profits, the company can make a credible promise to pay interest on loans making it possible for the company to borrow money.
The two most common ways for businesses to borrow money are banks and bonds.
A bank loan for a business function similarly to a loan for an individual purchasing a car or a home. The company borrows money and then promises to repay it, along with some interest, over a set period of time.
If the company fails to make loan payments, the bank can often take the company to court and force it to sell its assets.
Want to know more about loans for small startup businesses even if they have bad credit? Read this article.
Unlike small business lenders, angel investors are typically high-net-worth individuals who can offer cash in exchange for a portion of your company’s profits or equity.
A wealthy angel investor is looking for companies in their early stages that have the potential to become profitable. The investment can be in hundreds of thousands of dollars, and it is usually not a long-term relationship.
Business owners may also receive mentoring depending on the angel investor, though this is not guaranteed.
Fund It Yourself
Although it may not seem ideal, using your personal savings to fund a startup is most likely the simplest way to raise capital.
Naturally, funding the business yourself entails some risk. However, the fact that you believe in your business enough to invest in it can make investors or lenders more likely to commit funding to it as well.
This is a very good reason to have some already functioning passive income sources for yourself.
Venture capitalists are another type of potential investors who are more interested in developing a relationship with a company’s leaders.
Typically, venture capital involves a group of entrepreneurs, bankers, product developers, and so on. Their mission is to identify business owners and companies that may go public.
Venture capital funds manage portfolios worth hundreds of millions of dollars, but their equity stake in a company is typically small. Your company could receive multiple rounds of equity investment from venture capital over the course of several years.
You may not feel comfortable asking friends and family for money, but 38% of startup founders report raising funds from loved ones, according to Fundable.
Furthermore, friends and family are said to invest the most – more than $60 billion per year. Although, many say that these people may add unnecessary stress to the capital raising process.
Crowdfunding is the most recent capital-raising strategy to emerge. Because of the internet, startups such as Elevation Lab, the creators of the iPhone dock, and Oculus, which was later acquired by Facebook, have become household names. Kickstarter, GoFundMe, and Indiegogo are three of the most well-known crowdfunding platforms.
What To Keep in Check When Raising Capital for your Business
Raising capital for your business is a process, and you want to make sure you go through this process properly to avoid unnecessary mistakes and failures.
Here are some best practices for raising money for a business;
Always Exercise Caution
Whatever type of fundraising you do, always exercise caution to avoid getting the short end of the deal. This is especially very advisable when it comes to funding.
Always Express your Passion
This is very advisable for crowdfunding; the audience becomes interested in your business when they can feel the passion emanating from you.
Be very creative in your fundraising efforts. It’s about much more than simply asking for a check, just like in a business deal negotiation. When considering fundraising options, think out of the box.
Make Sure that Your Book Keeping is Intact
Proper bookkeeping is very necessary for crowdfunding. This does not have anything to do with the size of your business. One of the first things investors consider before making a move is if the company’s books are in order.
Let Your Business Pitch be Fine Tuned
In your business pitch, refine your value proposition. Donors and investors want to know how their money will help you achieve your goal. Make sure you highlight the features that distinguish your company.
In summary, raising capital is essential for companies looking for long-term stability and success, and can come from three sources: retained earnings, debt financing, and equity financing. As a startup company, you can raise capital from crowdfunding, angel investors, taking business loans or from family and friends.