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Once you have determined how much funding you will require to start your business, decide how you will raise the capital. Choosing the right source depends on what you intend to use the money for, how much you need, what the alternatives are, and matching the source of the funds for the use. To help navigate how to raise money to start your business, consider these six steps.
Step 1: Minimize How Much You Need
Carefully check how much capital you require, as lowering the amount makes it easier to raise money and can help guide you to the right method. There are several things you can do, for example:
- Borrow equipment before buying, leveraging your contacts and network to meet short-term needs.
- Buy equipment second-hand, rather than new.
- Lease rather than buying equipment and vehicles (seek professional advice on the implications, tax and otherwise).
- Limit the number of products at the time of launch to lower start-up production costs.
- Use lower-cost premises.
- Buy only the quantities of materials or inventory you need.
If you’ve taken the above steps but you’re still short of money, bootstrapping your business could be the answer, shortcutting your way to starting up. This might include not taking a salary for a while, making use of sweat equity, selling personal assets to raise cash, and calling in favors from your network.
Step 2: Start with Your Own Cash
Having your own money to invest in your business makes sense. It shows you’re invested in your business and enables you to maintain ownership of your business. Common sources of cash include your savings or equity you have in any property you own (residential or commercial).
Money from friends and family is another way of accessing the cash you need. While this might be appealing, it’s important to set out the terms of any loan ahead of time, to prevent conflicts in the future.
Step 3: Partner with Others
Are there other business owners or companies you could collaborate with? If you want to enter an export market, one option is to raise capital to fund the infrastructure you’ll need, while another option is finding an existing business already exporting that you could partner with. A strategic alliance with a partner could be a benefit in the short and long term to both businesses.
Step 4: If It Makes Sense, Borrow the Money You Need
Discuss your financing options with your bank and other lenders to consider your borrowing options. Make sure you’re aware of all the obligations and costs before you proceed.
Bank Business Loans:
- Come with fixed terms at the borrowed rate.
- Can be secured (with an asset) or unsecured, like a personal loan.
- Have predictable payments and costs, so you can budget your expenses.
While Business lines of credit give you easy and flexible access to cash that you can pay back at any time during your draw period. The funding enables you to cover immediate costs or bridge funding gaps.
Learn more about Central Pacific Bank’s business loans and lines of credit.
Step 5: External Capital
If your new business has a bright future, it’s possible outside investors may be prepared to contribute initial capital.
Angel investors typically seek business opportunities with promising growth opportunity. You can search online for local providers, but often funding will be sourced from local entrepreneurs, councils, corporate investors, incubators, and accelerators.
Venture capitalists tend to be investment companies seeking more established businesses.
Investigate emerging funding sources such as crowdfunding, where groups of people pool small amounts together as an investment or a down payment on a future purchase. This might suit your type of business.
Step 6: Grants and Subsidies
It’s always worth checking out what the government (federal and state) can offer. This type of funding mostly comes in the form of grants, tax breaks, wage subsidies, or loan guarantees.
The Small Business Administration (SBA) offers loans and lines of credit through preferred lenders. These are backed by the U.S. Government and often offer lower interest rates with more flexibility.
Read more about obtaining an SBA Loan through Central Pacific Bank.
Next Steps
At the end of the day, the best sources of funds are most likely those that free you up to grow your business without excessive costs to weigh you down. Determine how much money you need and investigate your options to find the mix of funding that works best for your business. Consider a combination of sources of funds to ensure you have enough capital for a contingency fund, so you do not need to seek additional funding immediately after launch.
