How to Raise Capital for Your Startup
It’s impossible to start a business without cash. Working capital is the lifeblood of your business; without it, your startup could never grow and survive in a competitive industry. However, raising capital for your startup is easier said than done.
If you’re looking to raise money for your startup, you need to have a clearly defined plan, so you don’t waste valuable time and effort. At the end of the day, it’s critical you understand the basics of raising working capital for your business. Here are four ways you can do just that.
1. Use Your Own Money
Some people are fortunate enough to use their own resources to fund their businesses. In fact, using personal finances is the most common way to fund a new business. Business owners and team members usually pool their finances together to raise money. Obviously, you need to have a substantial amount of cash or assets in order to do this. Funding your own business tells potential investors and lenders that you’re serious about your venture. It also lets them know that you have faith in your business and you are confident it will succeed.
2. Crowdfunding
Simply put, crowdfunding is raising money from the public. There are crowdfunding websites where aspiring business owners and entrepreneurs can pitch their business ideas to a community of investors. A crowdfunding platform lets you thoroughly share your business model and explain its potential for success. If an investor (aka the public) likes your idea, they will publicly pledge to support and donate funds to your business.
3. Family and Friends
Family and friends are generally supportive of whatever you do, so it only makes sense to ask them to invest in your operation. Since they know your potential and your determination to succeed, they’ll be more willing to loan you money to start your business.
While borrowing from family and friends seems like an ideal solution, it still has its share of disadvantages. Borrowing money from them doesn’t require the same legal documents provided by traditional financial institutions. A lack of clarity can be detrimental to your business and your personal relationships if something unexpected was to happen. If you choose to borrow funds from friends and family, it’s best to draft contracts and follow the steps traditionally taken by established financial institutions.
4. Apply for SBA 7(a) Loans
Most business owners apply for a bank loan if they need funding. But the problem when you are a startup is, you rarely qualify for a traditional business loan. This is why the Small Business Administration created loan programs for small business owners looking to secure financing. As long as your business is eligible for an SBA 7(a) loan and you have good credit, applying for an SBA 7(a) loan shouldn’t be a problem.
5. Finance Pending Invoices
If you have several pending invoices, you don’t have to wait for 30, 60, or 90 days to receive payment from your customers. You can instantly increase your working capital by financing your invoices.
Invoice financing is the process of selling your outstanding invoices to third-party companies (lenders) in exchange for immediate funding. Lenders can give us much as 80% to 90% of the total invoice value upfront, while the rest of the amount, minus fees, is to be given once your customers pay their dues. Aside from the immediate funding, lending companies also take on the responsibility of collecting payments from your customers. Rather than paying you, they’re going to pay their balances to the lender.
6. Get a Cash Advance
You’re probably wondering where businesses can receive cash advances. A merchant cash advance is another financing option that gives business owners immediate funding. It’s not a loan, but rather a cash advance against your future credit card and/or debit card transactions. To repay the cash advance, lenders will automatically deduct a percentage of your card transactions. Keep in mind that a merchant cash advance has one of the most expensive rates. Make sure to assess your business’ capacity to repay the advance before committing.
Running a business can be difficult, but it’s 100x harder if you don’t have an adequate amount of working capital. One of the best ways to increase capital is to get enough funding for you business, either through business grants or savings.