Small businesses often encounter a multitude of challenges in today's fast-paced economy. One hurdle that often arises is the need to secure capital consistently. What makes the entrepreneurial journey so unique is finding funding. It's a great time to become creative in finding capital which goes a long way, truly propelling a business toward success. There are various strategies for helping a business raise capital but also guide you through the complex terrain of business finance.
What are some funding options?
Method 1 & 2: Bootstrapping or Friends and Family
Are you relying solely on personal finances or friends and family to fund your new start-up? The most common funding methods in the early stages are bootstrapping or asking friends and family, but not always the most effective. Often, the startup costs and operating expenses surpass the amount an individual can withstand utilizing their personal finances, and contributions from friends or family may not be enough to cover the differential. If you find yourself caught in this situation, reach out to a trusted advisor and ask about potential funding opportunities. There are several options at your disposal, and we've outlined ways to increase your chances of receiving funding using these other methods.
Method 3: Angel Investors
Another option for funding may come through a private party that focuses on small business ventures. An angel investor is a person who typically has a high net worth and a significant amount of disposable income. What this means is the dollar amount you receive will vary depending on the person, what they feel is a good investment, and how much they believe in your business. However, like most things, it's not for free. An angel investor will provide funding in exchange for equity. Typically, this person is looking for a significant return on their investment. In this instance, knowing a person or two who may connect you with someone in this position will go a long way. We discuss later about building strong relationships with your network, banks, etc. because you never know where an opportunity may arise from. You can also read our blog about building strong banking relationships(Primetrics, 2023).
Method 4: Venture Capitalist
When you are at a stage of development and innovation, comes the opportunity to use Venture Capital (VC). Similar to an angel investor, VC is private equity that funds startups and emerging early-stage companies with great potential for growth. The difference between the two is simple; whose money is being invested? An angel investor is utilizing their own net worth as opposed to a venture capitalist who funds a VC firm and the firm allocates a specific dollar amount based on a business needs. The benefit of this method is the access you receive such as networking with partners or experts, and the support received when your business needs more funding.
Method 5: SB Loans or Grants
The most common form of raising capital for an SMB is through business loans and applying for grants. With business loans, there are a few options to choose which will be determined by business needs and what stage of development you are in.
The 7(a) loan is the most common through the Small Business Administration (SBA). This option is quite useful if you are looking to include real estate, short and long-term working capital, refinancing current debt, or purchasing machinery, equipment, furniture, supplies, etc. The maximum loan amount through a 7(a) loan is $5M.
Need help to finance major fixed assets? The 504 loan is one option for small businesses as long as the major fixed assets promote job creation and business growth. A borrower can utilize this form of financing on three projects for up to $5.5M per project. These loans are available through Certified Development Companies, other known as CDCs. (List of CDCs to consider.)
The microloan program is useful for small purchases. You can take up to $50,000 in loans from the program. Here are a few items of what you could use this loan for; inventory, supplies, furniture, machinery, working capital, and equipment. (Micro-lender options for you.)
Prepare a solid business plan.
"Tell us about your revenue model." or "How well do you understand the competition field," are questions you will be asked when pitching to investors. All investors will do their due diligence in understanding the business, the concepts, the projections, and other facets needed to make an informed decision. Your job is to make that information as clear and accurate as possible. If you are able to do this effectively with a well-blended pitch presentation, you will increase the chance of persuading the investor and hopefully build a strong relationship with them in the process.
Have you done your due diligence?
Investors want to know you have all your affairs in order and they are not blindsided by any legal or financial issues. Those committed to your vision and understanding the concepts and ideas you bring forth are not asking questions about the product anymore, they are asking questions about the risk factors. So you will want to take the time to speak with a law firm and accounting financial advisor about investment agreements, legal structure, financial records, etc. All will serve as a helping tool for the ultimate goal and that is to get an investor in the door.
Crafting a compelling pitch is essential to secure funding. Your pitch should communicate your business's value proposition, the problem it solves, your market strategy, financial projections, and the potential return on investment. Practice your pitch until the message is clear, the vision is engaging, and tailored to your audience.
Building Strong Relationships
When seeking external funding, building relationships is key. Investors are not just providing money; they're partnering with you on your business journey. Networking events, pitch competitions, and industry conferences can help you connect with potential investors and advisors who share your vision. As we mentioned earlier, creating and nurturing relationships is vital in the business world. The opportunities that may arise can be business-altering.
Raising capital for a small business can be a transformative step, but it requires careful planning, strategic thinking, and persistence. Understanding your capital needs, exploring various funding options, preparing a robust business plan, building relationships, pitching effectively, and addressing legal considerations are all vital components of a successful fundraising campaign. Remember, each business is unique, so tailor your approach to what aligns best with your goals and vision.
If you have questions regarding the different methods of raising capital, please reach out. Our team has years of experience working with entrepreneurs who've been in situations where a few extra dollars were needed to push their company to the next phase. We can help provide insight into the decision, but also help you prepare to step in front of investors with a clear picture from the financial side.