If you run a startup, you likely need funds to help you launch and/or grow your business. Few companies have enough capital to do so over the long term, and so they look for options to raise capital.
What Does it Mean to Raise Capital?
The term “raise capital” is just a fancy way of saying a company seeks solutions to financing. There are a couple of categories for raising capital, which we’ll cover in this article:
- Debt capital
- Equity capital
Both have their own drawbacks and benefits to consider, and neither offer “free money.” There is always a cost to raising money. Whether it’s worth that cost is up to you.
Funding Operations with Capital
So why raise capital if it costs you? Consider what your startup could do if it had an extra $10,000, $100,000, or even $1 million. You could hire more staff so that you could better serve customers. You could invest in marketing to reach a wider audience. You could purchase equipment and software to streamline your business.
Bottom line: having more capital can help you grow faster. The key is knowing exactly how you’ll spend the money to make the most efficient use of it.
So I mentioned there were two categories of capital you could raise. The first is debt capital. This includes things like business credit cards, business lines of credit, and small business loans. You’re taking on debt that must be repaid—with interest—in order to get the capital you need.
Businesses that are more established may find it easier to qualify for debt financing than early-stage startups since banks and some lenders require you to be in business for two or more years to qualify for bank loans.
The other of your financing options is equity financing. This is where investors, typically angel investors or venture capitalists, provide capital for your business in exchange for equity in your company.
As I said: there’s a cost to all the capital you raise, and in this case, you’re paying with equity in your company. That may mean you give up control or have to let investors have a say in how you operate your startup.
Venture capital firms often specialize in fundraising for certain industries and may be able to introduce you to industry contacts and potential partners, which is a boon.
Another way to raise capital is crowdfunding. Sites like Kickstarter allow private investors to contribute money to your venture or project. Some crowdfunding sites are donation-based, meaning you don’t have to repay the money. Others offer equity to investors.
How to Raise Capital for a New Business
Business owners who are just starting their companies may be limited in their traditional financing options. Banks may want you to be in business for two years, though there are short-term loans like those from Kapitus that you may qualify for. Just be aware that these may have high interest rates.
New startups may also qualify for credit cards like Capital on Tap, which allows you to charge the purchases you need and earn rewards.
Whichever debt option you choose, now is a good time to learn how to establish business credit so that you qualify for better financing options down the road.
If you decide to go the equity capital route, look for a venture capital firm or angel investor who has experience working with businesses in your industry. You’ll need to do a business valuation to determine what your business is worth so you can decide how much equity you’re willing to give up.
Let’s say your business is valued at $1 million and you are looking for an investment of $100k. This means you’d give up 10% equity in your business to get the cash.
You’ll need to make your startup shine to potential investors by providing an informative pitch deck, business plan, and financials like your balance sheet. Remember: they’ll want to know what’s in it for them, so be sure to show the potential growth their investment can bring.
Once you find an investor who wants to work with you, it’s time to negotiate. You will need to discuss what the investor expects his role to be within your company. Does he want a seat on your Board of Directors? To have a say in major business decisions? These can be negotiated, so make sure you are comfortable with the terms.
How to Raise Capital for an Existing Business
Companies that have been operating for two years or more may find it easier to raise money, especially if you have good credit.
An SBA loan should be at the top of your list if that’s the case because they offer the lowest interest and longest repayment terms of any loan. Lenders like SmartBiz can help you find the right SBA loan.
Prospective investors may find the fact that your business is more established as appealing, and if you’ve already raised a Series A round, you may find it easier to find investors ready to help with a Series B round to even out cash flow.
Again, know exactly what you will do with the money you’re seeking, whether you opt for equity or debt financing. Build a budget so that you—as well as potential investors—have an idea of how that money will help your business reach the next level.
Entrepreneurship can be challenging, but you didn’t choose the easy road, did you? If bootstrapping your business isn’t an option, or if it’s holding you back from faster growth, look to financial institutions and investors who can turn those pipe dreams you’ve been sitting on into a reality.
This article was originally written on November 5, 2021 and updated on May 10, 2022.