Regardless if you are a startup or looking to further develop an already existing company, it is helpful to know the basic methods of raising capital.
- Investors and Lenders
Starting from ground 0 with just a prototype, idea, or service can be an uphill battle to provide proof of profit or use profit as a form of reinvestment. Often, in the early stages, the business owner may take the risk of using their savings or borrowing money. Venture Capital firms can also play a part in early-stage investment, specifically if the company seems to have the potential to blossom. Ultimately, early-stage investors are confident enough in the business to take a more considerable upfront risk, putting themselves in the position for a larger piece of the pie.
- Reinvesting Capital
With some experience under their belts, once a company starts making a profit (revenue > costs), the possibility to reinvest those profits becomes available. This can become a primary source of financial capital; however, it is risky not to diversify capital through other sources. Reinvesting capital can look like purchasing new equipment or R&D (research and development). When you are reinvesting profits, you are putting all of your coins in one basket with the hope of achieving higher quality.
Borrowing through banks requires credibility which can only be built through time and trial. Proof that you are making profit and capable of paying both principal and interest may lead to more favorable borrowing terms.
Bonds are financial contracts where a borrower promises to pay back the lender a sum of money plus interest. There are municipal bonds and corporate bonds. Click the links if you would like to know more about each specific bond and how it might benefit your business.
- Selling Stocks
Not every business has this option. Stock is essentially the ownership of a company. Selling stock can offer cash quickly; however, understanding what price that is coming at is critical. Selling ownership means less control over decisions, so who the business is selling stock to is an integral piece of the equation, especially early on in business ventures. After a company goes public and firms make payments to stockholders through dividends.
Each route has different pros and cons to consider. The most important aspect is carefully thinking through the costs and methods of how your business is repaying these sources.
Strategies to Raising Capital
With a deeper understanding of the five methods to raise your businesses capital, it is essential to implement the correct strategies
- Do your research, understand the marketing and current industry trends. Ask yourself; What does the market look like? Is the health of the industry conducive to the growing plans? What risks does the industry bring? Plan ahead.
- Money Matters.
- Take advantage of investors' knowledge. Your investors can provide you with more than just cash.
- They are interested in the well-being of the business succeeding and can be sureful banks of knowledge. Not tapping into their knowledge is a waste of money. Ask yourself; what do they bring to the table? Who is in their network? What do they know about the industry you may be in the dark about?
- Know your business. Ask yourself; what is your management structure, how strong is it, and how well does management lead?How do you want to grow and what are the action steps being taken to move forward in the timeline? Is growth slow and consistent or rapid and aggressive? How is management prepared to shift with organizational development? What does the big picture look like?
- Know your competitors and your risks. Ask yourself; How are you flexible to adapting with a changing business environment? Who is in the playing field? What is the businesses competitive advantage?
- Find your voice and know what you bring to the table. Be confident in your business and the capability to raise capital. Finding the right investors is about more than the price tag of their money.
Helpful Tips When Looking To Raising Capital
- Raising capital can take time; time costs money. While preparing and planning to meet with a bank, be prepared to be spending time, money, and creative resources. Always remember to set healthy goals and timelines to be accurate and correctly measure growth. If not, be realistic and set a more extended timeline. Out of pocket expenses can be hefty, so research hidden costs to be fully prepared.
- While risky, if you plan to invest your own money, this can be the easiest and fastest way to get your company's capital to improve significantly. Always remember to do proper research and never invest in something you are not too comfortable with.