Share
Many businesses need to raise extra capital or funding at some stage in their growth.
The first task is figuring out how much you need and what it’s for. For example, you could be aiming to increase capacity by investing in new equipment or expanding your facilities. Or you might be planning to buy a competitor. Whatever the reason, the first part of your business case is to clearly define the reasons you need extra capital. Once you’ve done that, you’ll have a clearer idea of just how much you’ll need, and whether it’s justified.
Now that you know why you need the money and how much you need, it’s time to investigate your options for financing. These include money already available to you, business loans or lines of credit, and investors.
Funding Options
Here are some important things to keep in mind when deciding on the best funding options for you.
Money from Your Business
Before borrowing money or looking for investors, a solid first step is to look inside your business to see if you already have access to some of the money you’ll need. For example, you could explore selling equipment you don’t use very often (and leasing it when you do need it), cutting down on travel expenses by hosting virtual meetings, reducing your personal withdrawals, or re-negotiating deals with suppliers for better credit terms.
Your Personal Funds
Always evaluate whether you can provide your own funds before taking out another loan. Also known as ‘bootstrapping’, self-financing is the most common form of raising capital for business start-ups.
While putting in your own money increases the financial risk to you, banks, government lenders, and other investors will want to see that you’re invested in your business. Investing your own money also enables you to maintain more ownership of your business and decreases your long-term debts.
Friends and Family
Your friends and family can often be a first option for seeking finance as they’re easy to approach and want to see your business venture do well.
You may be able to borrow money for little or no interest, giving you a huge advantage as you look to establish or grow your business. Make sure to set out the terms of the exchange, such as when and how the money will be repaid, what it will be used for, and whether interest will be charged.
Partners
Depending on your goals, you may be able to partner with an existing business to provide the support and resources you need to grow. For example, if you’re looking to export you may be able to partner with an existing exporter to cut down on your costs by giving them a margin of your profits. In this way you can make it less expensive to grow without attaching yourself to another fixed cost.
Angel Investors
Angel investors are successful individuals (often other business owners) who are interested in investing their own personal funds into promising small businesses. They’ll want to invest funds in your business if it has high growth prospects.
Search for angel investors that have expertise in your industry, as they’ll be interested in contributing their own skills to your business. They usually prefer to 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 invest at an early stage, which can help with your start up. They bring their own experience to the table, which is knowledge you should consider taking advantage of.
You can learn more by visiting the US Angel Capital Association.
Venture Capitalists
Venture capitalists typically invest in young companies they anticipate will be sold to the public, or to a larger company, at a high rate of return. If your business is in a fast-growing industry with a large market potential, you may just catch the eye of an investor.
Like angel investors, venture capitalists (VCs) provide funding in exchange for a share in your company. Unlike angel investors, VCs invest on a much larger scale – typically millions of dollars. They rarely invest in an untested idea, preferring businesses that can demonstrate rapid, consistent growth and guarantee a worthwhile return. As shareholders, venture capitalists earn a portion of annual revenue – but the real profit isn't made until the company is sold.
For more information on the venture capital environment in the US, visit the US National Venture Capital Association.
Crowdfunding
Crowdfunding is one of the newer avenues for businesses to take when raising capital. The concept behind crowdfunding is to let prospective entrepreneurs seek capital from many investors in small amounts online.
Make sure you research your options thoroughly before choosing a crowdfunding platform to seek investment through. Fundable and Indiegogo are just two of many popular crowdfunding platforms focused on U.S. start-ups.
Government Grants, Subsidies, and Loans
It’s always worth checking out what the government can offer you. Mostly, this type of funding comes in the form of grants, but you may also be eligible for subsidies or loans. Governments at all levels want your business to succeed, so they create programs to supply tax breaks, wage subsidies, or loan guarantees.
You could be eligible for Small Business Administration (SBA) lending. The SBA offers both loans and lines of credit through lenders like Central Pacific Bank, with lower monthly payments and longer terms guaranteed by the U.S. government. These are designed for businesses that have strong revenue but struggle to find traditional funding.
Learn more about the SBA’s 7(a) Loan Program, CAPLines Loan Program, and Certified Development Company (504) Loan Program, or lines of credit.
Bank Loans, Lines of Credit, and Credit Cards
You may be eligible for a bank business loan to fund your growth or expansion. Different banks have various options and terms for business loans, so you’ll want to talk with them directly to determine which bank loans have the terms that work best for your needs.
Bank business loans offer fixed terms at the borrowed rate, so you know how much you’ll repay monthly. This gives you predictable payments and costs, which makes it easier to budget and plan your expenses. Loans can be secured with assets or unsecured, much like a personal loan. Additionally, some loans may be available specifically for your type of business, such as healthcare practice loans.
A line of credit provides you with financial resources you can draw from and pay back anytime during the draw period. The flexible funding enables you to cover your immediate costs or bridge gaps in your funding.
Learn more about Central Pacific Bank’s Business Express Line of Credit and Business Express Term Loan.
If you just need a little money to cover your costs, a business credit card can provide you with the funds you need. These come with different interest rates depending on your credit history and may have benefits such as cash back or points.
Peer-to-Peer Lending
In peer-to-peer (P2P) lending, you borrow money directly from other individuals or investors rather than from a bank or other traditional financial institution. P2P lending is facilitated through online platforms designed to connect borrowers and lenders. You’ll still need to repay the loan and undergo a credit assessment to determine your creditworthiness, but you’ll have access to funding you may not otherwise have through a bank, and you may be able to access lower interest rates.
Preparing Your Business to Raise Capital
Regardless of where you decide to source the funds your business needs, it’s best to be as prepared as possible. These tips will help you present a strong business case to whomever you talk to:
- Speak to advisors who can guide you as you look for funding. Your business banker, lawyer, and accountant are all people you should consult.
- Build your business case by reviewing your business plan and presenting it well. Define your goals, how you’re going to achieve them, and why you need capital and how much you require.
- Show you’re unique by highlighting what will make you stand out. Showcase your competitive advantage and point of difference.
- Look for leverage and make sure you’ve done your due diligence on all potential investors so you can decide on the best option for you.
- Be aware that there are some risks in raising capital. You may be taking on additional debt or you may have to hand over some control of your company if you seek investors. Make sure you’re comfortable with the consequences of whichever options you choose.
Next Steps
The first step in borrowing money to grow your business is to determine how much money you need. Once you’ve done that, explore your current business and your personal finances to see how much of the money you can come up with yourself, without putting either your business or yourself in financial jeopardy. After that, consider what type of funding you’re most comfortable with and explore the options available to you.
