How to raise funds for a new business: 6 options every entrepreneur needs to be aware of
Finance and investment is at the core of the 12 Hay Hill membership, with the majority of our members actively investing, or receiving investment for their businesses. We caught up with some of our members to discuss the best investment opportunities available to newer and emerging businesses.
Once an entrepreneur has developed an idea or taken their service to market, they often face the daunting task of raising funds to grow. There are many options to raise funds for a new business, but there is no one way that works for everyone. For example, some people may choose an angel investor while others might be more likely to get loans from banks.
This blog post will explore 6 of the best options available for you to raise funds for a new business. This will allow you to make an informed decision about which option is right for you.
Why raise funding for your startup?
There are a number of reasons why an entrepreneur may need to raise money for their business. These include, but are not limited to: hiring new employees, scaling the business or company, marketing and advertising costs, and purchasing new equipment.
By outlining why you want to raise the money, you will also start to see which funding option is best for you. Whether you are looking for expertise as well as investment, or specific terms that you can’t get with a standard bank loan. Take a look at the below and familiarise yourself with the funding options available.
What are the options for how to raise funds for new business?
Here is a list of 6 different options that you may be able to choose from when seeking how to raise funds for your business:
1) Crowdfunding
Crowdfunding is raising money from a large number of people, typically strangers or non-strangers. There are 2 types of crowdfunding: rewards and debt/equity. Rewards-based crowdfunding allows individuals to donate money in return for some type of reward, such as a t-shirt or the product itself if it is still being developed. While you don’t have to pay back rewards-based crowdfunding, it does have limits to how much you can raise. Debt/equity crowdfunding allows people to invest in your company in return for shares or debt.
A business must set up a campaign on a crowdfunding platform in order to raise funds. Within the campaign the business will set out how much money they are trying to raise and how long it will take them to do so. When the goal of that campaign is met then all payments are processed through the crowdfunding platform and the business is free to use the investment however they see fit. If they are not close to meeting their goal then all pledges are refunded.
2) Angel investment
Angel investment typically comes from high-net worth individuals. They can provide money in exchange for equity or use a convertible loan instrument and will invest in your business if they believe you have the potential to be successful in the long term. These types of investors are often looking for businesses that fit within their specific area of expertise and can provide invaluable advice in the early stages.
If an entrepreneur is interested in being financed by angel investors they must have a clear business plan and look at how similar companies have done.
3) Venture Capital
Venture Capital companies raise funds and will typically invest in startups if they believe the company will generate an incredibly high return on investment. They often look for returns of hundreds or even thousands of times greater than their investment.
Venture Capital funds can invest significant amounts of capital but there are disadvantages. Such as how long the process can take, how much of the company they may own and subsequent control they have. Venture Capital firms typically invest in very few startups, and instead focus on safer and more established businesses which they know will bring them a return.
4) Personal debt and credit cards
One way to inject funding into your business is to raise finance personally through loans or using credit cards. If a business has a low debt to income ratio they may be able to get a loan from the bank. The downside is that personal finance loans typically have much higher interest rates than credit card debt.
Credit cards allow an individual to borrow money while still maintaining full control of their business. However, credit cards can also charge high interest rates and should only be used with caution as you will be personally liable for repayments.
5) Bank loans or debt
If your business is already generating income then you may be able to access a bank loan or finance growth through debt. Banks will usually only lend to businesses that have a stable income and provide security and will often look at how long the business has been operating, how much revenue it is making and how quickly it is expanding.
6) Bootstrapping
One approach you can take is to keep costs to a minimum and bootstrap growth. Bootstrapping is about being creative and using what you have to further your business without borrowing money.
An obvious tactic is to look for grants and start-up competitions where entrepreneurs can win prizes in exchange for equity or cash contributions. You may also be able to get employees or consultants to work for “sweat-equity” or just accept a lower salary than they’d like.
Which finance option is right for me?
From the options above it’s important that you take time to consider which options are right from you, depending on what your goals for your business are. V/C funding, whilst effective can often leave a business owner feeling pushed out of their own business and find that decisions are being made on your behalf, but also packs a punch and can help drive your business to the next level.
Angel investors may be hard to come by, depending on your industry or business type, but can be an effective tool for growth, as they not only come with the financial backing, but you also get an investor who is passionate about your business and wants to help it succeed as much as you.
Crowdfunding is a great option for anyone with a business that the general public can get behind – a business needs to have a bit of a sexy angle for this to work well, with disruptors and environmentally sound projects taking the majority of the backing.
Then there is the classic option of bankrolling your business through the banks themselves – you don’t have to sacrifice equity and you’re not beholden to shareholders, but with that you also assume 100% of the risk.
If you are interested in investment opportunities, speak to Jess, the 12 Hay Hill Membership Manager, who will be able to point you in the direction of some of our fellow members who can help and advise.
