Everyone knows that raising capital to finance a new startup is not that easy, especially, if you’re new to entrepreneurship and just starting to find your feet.
If you are planning to get people to invest in your business idea, you will need to be able to convince them that your idea is worthy of their investments.
But if you know what you are doing and have a strong belief in it, it wouldn’t be that difficult to find people to invest in you and your idea.
Raising capital to finance a startup
Equip yourself with a strong belief, commitment, and a clear business plan, it won’t take long for you to find people that are interested in your startup.
However, getting the right source of capital is a bit more complex and difficult. Each source of capital has its own unique advantages and disadvantages. Below are 7 of the most reliable sources when it comes to raising money for your startup:
#1]. Raise capital via a business partner
If you don’t have the required capital to start your business, you can raise capital to finance a new startup by looking for a business partner who can help you raise the funds to start the business.
However, it’s not just about selecting a partner for your business, you need to make sure that their own goals for the business are aligned with yours.
This means that you can just select anyhow, you need to make sure you are making the right selections.
It is not just about selecting a business partner, you have to be careful to negotiate your own financing terms with equal tenacity even when all you have is a vision for the future. The difference may one day be worth millions.
It is also a good idea to have a buyout agreement in place in case of a breakdown in the business relationship. This should stipulate that the other partner must agree to a proposed buyout within a set time frame or buy out the other partner themselves.
#2]. Raise capital via family & friend
Another option is to borrow money from friends and families. However, you have to be very careful the way you handle financial support from family if you don’t want it to affect your relationship with them.
The risk of borrowing money from friends and family is high but so is the reward when you are able to grow not only your own wealth but friends and families along the way.
A number of successful businesses started out with a loan from friends and family members, just be mindful of the pitfalls and burdens that may come about in turbulent times.
It is also worth remembering that over 50% of small businesses fail in their first 5 years of operation often because of factors completely outside of the control of the owners.
Make sure that you are not borrowing money that they can’t afford to lose. Put any lending agreement in writing with the terms clearly laid out even if it is a “friendly” loan.
#3]. Raise capital via crowdfunding
Another good way to raise capital to finance a new startup is through Crowdfunding websites. Crowdfunding offers a great avenue or platform for entrepreneurs to raise money to finance their great ideas.
Most crowdfunding websites are using a reward-based model. This helps the people who invest in a new business venture to have some form of reward.
Such rewards could be the product that is going to be produced, while others are equity-based crowdfunding.
It is just a new way for people to invest in a startup. It offers people the opportunity to invest and follow a company’s progress and be part of their success.
However, if you are planning to get your project funded online make sure you understand how crowdfunding websites work and don’t forget to search around for some of the best crowdfunding websites that can help you secure funds for your startup.
#4]. Angel investment networks
Angel investment network is another means of raising capital to finance a new startup. What’s angel investing? Angel investing is equity finance.
An Angel investor makes use of his or her personal disposable finance and makes their own decision about making the investment.
Angel investor uses their business or professional experience to invest in the growth of a small business, generally in a startup or early stage. Angel investors can make investments on their own or as part of a group (syndicate).
The investor would normally take shares in your business in return for providing equity finance. Some of the world’s largest businesses including Google, Facebook, Skype, and Twitter have received angel investment funds.
The benefits of receiving angel investment go beyond purely financial. The advice and connections that a good angel investor can offer can be equally as valuable. Angel investors are willing to take on the risk of a brand new startup.
#5]. Bank loan / credit cards
One option that many people take is to apply for a business loan. You will need to prepare a detailed business plan to present to the bank, and they will expect to know every aspect of how you and your business will function financially.
Mind you, the bank’s decision on whether to grant a loan will be based on various factors. These factors include how much experience you have, how much of your own money you will invest.
They will also ask you such questions as the security you are able to offer for the loan. Credit cards on the other hand are generally not a good source of loan term capital given the hefty 10 – 20% plus interest rates on many of them.
That said credit cards have been used by many entrepreneurs when there were no other options available.
#6]. Raise capital via venture capital
Venture Capital can also help you raise money to finance your new startup. Venture capitalists aim to invest in early-stage businesses with high growth potential.
Traditionally venture capitalists received equity in the business in exchange for funding it. However these days they typically demand a mixture of equity and debt financing.
The venture capital business is based on the idea of a few big wins making up for a lot of poor performers. In fact, approximately 3 out of 4 businesses that receive venture capital fail.
Because of this venture, capitalists look for businesses that have a lot of growth potential. If the market for your business is more modest you may need to look elsewhere for funding.
#7]. Government grants / schemes
Another means through which you can finance your dream business can be through government schemes or grants for young entrepreneurs.
So, if you have no security to back your loan, the government’s Enterprise Finance Guarantee scheme might be able to help. There are also grants available from the Prince’s Trust Enterprise Programme or government business grants.
Both of these schemes have restrictions on who can apply but they are worth looking into if you meet the relevant criteria.
If you qualify, the government offers to guarantee 75% of a loan of up to £1 million against default. There is usually a 2% premium to pay on the loan and it cannot be for longer than ten years.