Raising Capital for Your Business
When you need additional funding, there are several options available.
Equity Capital and Debt Capital – The Difference
Debt CapitalThe most common form of raising capital is debt capital. Debt capital involves borrowing money from your bank (or other lenders) or issuing bonds. When you borrow debt capital, you’re obligated to repay the borrowed amount with added interest, but you don’t have to give up ownership in your company. Debt capital can be short-term funding like an overdraft for extra stock or used for longer-term goals like buying new equipment or a building.
Equity capital is less common, as it involves selling a portion of your business in exchange for cash. Equity capital represents ownership in a company and is raised by issuing shares of stock. Investors who hold these shares become partial owners and have a stake in your company’s profits and losses. If you require more capital than you can raise yourself or borrow, then you may wish to sell part of your business in return for extra funding. The main providers are:
- Angel investors – Angels are people (often other business owners) who think your business is promising and are willing to buy into your business. They usually invest in businesses they’re familiar with, wanting either a return on their investment, some equity, or both. The great thing about angel investors is that they’re usually keen to get involved at an early stage, bringing their own experience to the table.
- Venture capitalists – Venture capitalists are often investment companies or fund managers who provide cash in return for part-ownership of your business. They’re typically looking to invest larger sums of money, which could be above and beyond what you need, and their requirements can be tougher than angel investors.
Alternative Methods for Raising Capital
Government and state assistanceIt’s worth doing your research to see whether or not your business qualifies for government or state funding. This type of funding comes in the form of grants and can be a huge help for those who qualify.
At times, large companies (it could be a customer or supplier of yours) invest in smaller businesses they have a stake in seeing grow and expand.
Online capital raising forums are growing in popularity. They profile businesses seeking capital and rely on the online investor network to raise the capital required.
Prepare Your Business for Raising CapitalRegardless of where you plan to source the capital, it’s important to be prepared. These tips will help you pitch a strong business case:
- Speak to your business banker, lawyer, and accountant about finding investors. They might have industry contacts and helpful advice.
- Get your processes and systems running smoothly and monitor key performance indicators. Look for ways to work smarter, try and reduce overheads, and make sure all marketing is measured so you can prove what is working.
- Review your business plan and make sure it’s well presented. Define your goals, how you’re going to achieve them, why you need capital and how much you need. Justify your reasons in terms of growth and expansion opportunities.
- Showcase your competitive advantage and business differentiators.
- Demonstrate how you’ve protected your intellectual property and if you can, show that your business is scalable.
- Don’t accept the first person who offers money. Make sure you’ve done your due diligence on all potential investors, so you can decide which will work best with you and your business.
- Consider the risk of sharing ownership if you decide on the equity option.