Before you go down the path of seeking capital from outside your business, identify any other ways of you could raise the funds you need. For example, any savings (either in the business or you personally), any unused assets in the business (machinery that’s not used very often, buildings or excess stock you could sell).
There are a number of options if you need more money.
Equity capital and debt capital – the difference
The most common form of raising capital is ‘debt capital’ (money you borrow), usually from your bank (or friends and colleagues). It could be short-term funding like an overdraft for extra stock, or longer-term loans for buying new equipment or a building.
Less common is ‘equity capital’ where you raise cash in exchange for selling part of your business.
Most of us are familiar with borrowing money. The most popular sources are:
- Friends and family. Often a first option as they are easy to approach
- The bank, often by using spare equity in your house. Interest rates with a property as security is almost always cheaper than unsecured finance. You might also consider asset finance, where you borrow cash over the value of an asset, work in progress or stock.
If you require more capital than you can raise yourself or borrow, then you may wish to sell part of your business in return. The main providers are:
Angels are people (often other business owners) who think your business is promising and are willing to buy into your business. They usually invest in businesses they’re familiar with, wanting either a return on their investment, some equity, or both.
The great thing about angel investors is that they’re usually keen to get involved at an early stage, bringing their own experience to the table.
Are often investment companies or fund managers who provide cash in return for part-ownership of your business. They’re typically looking to invest larger sums of money, which could be above and beyond what you need, and their requirements can be tougher than angel investors.
Other forms of capital raising
Government and state assistance
It’s well worth checking out whether or not your business qualifies for government or state funding. Mostly, this type of funding comes in the form of grants.
At times large companies (it could be a customer or supplier of yours) invest in smaller businesses that they have a stake in seeing grow and expand.
Growing in popularity are online capital raising forums. They profile businesses seeking capital and then rely on the online investor network to raise the capital required.
Prepare your business for raising capital
Regardless of where you get the capital from, the more prepared you are the better. These tips will help you present a strong business case to whoever you are talking to:
- Speak to your business banker, lawyer and accountant about finding investors. They’ll have good contacts and advice
- Get your processes and systems running smoothly and monitor key performance indicators. Look for ways to work smarter, try and reduce overheads, and make sure all marketing is measured so you can prove what works
- Review your business plan and make sure it’s well presented. Define your goals, how you’re going to achieve them, why you need capital and how much you need. Justify your reasons in terms of growth and expansion opportunities
- Show you’re special by showcasing your competitive advantage and point of difference
- Demonstrate how you’ve protected your intellectual property and if you can, show that your business is scalable
- Don’t accept the first person who offers money. Make sure you’ve done your due diligence on all potential investors, so you can decide which will work best with you and your business
- Consider the risk of sharing ownership if you decide on the equity option.
The important thing to keep in mind is the number of ways you can raise capital and tailor the solution to best suit your needs. Speak to a financial advisor about what will work best for you.