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Exploring how to raise capital is often one of the first milestones in launching a new business. However, as companies continue to grow, they often face a similar event when deciding how to finance their expansion plans at the next level. When you’re planning this exciting phase, strategizing about the best ways to raise capital for a company will set the stage for smooth expansion.
Debt is simply borrowing money and repaying that amount plus interest at a later time. Many business owners apply for loans through the U.S. Small Business Administration. The SBA guarantees this type of funding for the lending financial institutions. To qualify, you generally need at least two years in business, a minimum yearly revenue of $100,000, and a credit score of at least 640. The SBA can also provide additional resources on how to raise capital to start a business.
Bootstrapping is another common method of debt capital in which an entrepreneur uses a loan or credit card to fund a new or growing venture. You might want to consider bootstrapping if you have good personal credit and can qualify for a business credit line or loan with a low interest rate. Some business owners who go this route refinance their homes, which is one of the riskiest ways to raise capital for business. However, having a personal stake in the company’s success can encourage investors to support your efforts.
If you decide to fund business growth with debt, make sure the loan in question provides a positive financial outcome. In other words, you should be able to use the money to create a significantly higher return than the amount you’ll pay in interest and fees over the life of the loan.
You should also have a clear plan to repay any debt you take on to grow your business. It may sound simple, but creating a monthly budget that projects the company’s income alongside debts and other obligations can provide a quick visual that indicates whether finances will stretch too thin with a new loan or line of credit.
Raising equity is selling a portion of your company in exchange for cash. Often, the first source of funding comes from personal and professional networks. Don’t discount the value of marketing your enterprise to friends, family, and others who have an interest in your success and may also feel passionate about the vision of your business.
No matter how much success you achieve with grassroots fundraising, entrepreneurs who want to know how to raise capital for a business in start-up mode often eventually rely on angel investors. These individuals strive to grow their wealth by investing in promising new companies. In fact, even Google started out with seed funding from an angel investor. If you go this route, look for an accredited investor. They must have a confirmed annual income of at least $200,000 or a net worth of more than $1 million.
Some companies find investors on crowdfunding platforms. You may be familiar with sites like Kickstarter, which typically solicit donations for one-time projects in exchange for a perk or benefit. Similarly, equity crowdfunding allows you to search for investors who are interested in financing a venture like yours and learn more about their credentials and track records.
If you’re preparing to scale a larger company and want to know how to increase capital, consider a venture capital firm or a private equity firm. Venture capital investors look for opportunities to buy into younger businesses poised for dramatic growth or even targeting an initial public offering on the stock exchange. Private equity firms, on the other hand, target investments in more mature companies that are already profitable and seek to grow the business over time.
Whether you decide that debt or equity capital is the right route for your company, you can avoid pitfalls during the fundraising process with these general strategies.
Gather comprehensive financial and strategic documents to create a case for lenders and investors. At a minimum, this should include details about your projected growth timeline, your capital funding goal, how you plan to use the money, and your current governance and management structure. You’ll need to include balance sheets, income and cash flow statements, and details about key performance metrics in your industry.
Areas to emphasize when seeking external funding include new opportunities, industry shifts, and innovations that make it the perfect time for a cash infusion. You should be able to give a short elevator pitch about what your business does and quickly explain why an investor or lender should be interested in your brand.
Forecast growth over at least the next 12 months when raising capital for your business. Your pitch should cover the company’s three benchmark financial goals: A pie-in-the-sky “stretch goal,” a solid, achievable but less ambitious goal, and a goal that falls in the middle ground between the two.
Focus on distinguishing your business from the competition. What attributes will attract the attention of investors and encourage them to fund your vision? Emphasize these unique characteristics in your pitch.
Just as the lender or investor is evaluating your company, you also need to perform due diligence before borrowing funds or signing on with a funding partner. Connect with other business owners who have used the same funding source and learn about their experiences. These types of references can give you information you won’t necessarily find by doing online research.
You don’t need to limit yourself to just one route to funding your business growth. Instead, develop multiple potential funding sources to accelerate the cash flow you need to scale a business in a sustainable way.
When you know how to gain capital, you can fulfill the vision you have for your business. This primer can help put your company on the path to sustainable expansion.