Less than five years ago, this blog post would have included only three options for early-stage entrepreneurs to raise capital. Today, it’s exciting to discuss a fourth—crowd funding. Whether you’re working on an idea and need some seed funding, or you’re already growing your business and adding paying customers and just need some additional capital, these four ideas may help:
Raising Capital Through Crowd Funding
Crowdfunding is one of the cleverest ways an entrepreneur can use to raise investment capital. Crowdfunding involves posting a project or venture idea online and raising small amounts of money from a large number of people. Through this manner, not only can it be an excellent opportunity to raise capital for startup or equipment costs, but it is a great way to gain market feedback and validation of your strategy.
Crowdfunding can be accomplished by posting your project, which typically includes a video promoting the idea and an appeal for funding, to a company’s own website or another third-party platform. There are pros and cons to each, but some of the most popular and successful campaign’s have been run on Kickstarter and IndieGoGo.
Raising Capital Through Bank Financing / SBA
This is the most traditional way of raising capital for business. Getting a loan to start a business usually requires a personal guarantee and government backing, provided through the Small Business Association’s loan program, SBA. There are many local banks who participate in the program, and a visit to a local branch can get an individual started. For companies with 3 or more years of a positive track record, they may submit for a line of credit or other business loan through local commercial banks. These carry covenants, or requirements, that must be abided by in order to stay in compliance with the loan. If your business performs outside of these parameters, your company may default on the loan and the full balance need immediate repayment. Bank loans should be approached only with professional assistance and caution. Also, before you get a loan, you will need to provide security for the loan. Such security may include personal assets such as your personal home, or assets of the business.
Raising Capital Through the 3 F’s—Fools, Friends and Family
No one wants the success of a starting entrepreneur more than family and friends. The key to remember with this group is that they’re not sophisticated investors. Take money with caution, as your personal relationships may be put on the line. Nevertheless, before considering financing institutions, you should discuss your business and its potential with your family and friends.
If you end up taking money from family and friends, ensure that all agreements are placed in writing with clearly laid out terms. This way, you will better be on track to differentiating business from your relationships.
Raising Capital Through Venture Capital
We’ve dedicated a number of blog posts to detailing out venture groups. These venture capitalists are waiting and ready to invest on brilliant business plan with high growth potential. Venture capitalists will only invest in your business if you are able to convince them that there is a tremendous market with strong potential returns on their investment.
For you to succeed with venture capital, you need to understand your business model well, provide financial projections and forecasts of your business and target market, and present a clear picture of how you plan to achieve your business goals and objectives.