The Challenge of Raising Capital for Small Business
Raising capital is one of the most difficult challenges faced by today’s entrepreneurs.
- Bank loans are very hard to get
- Risk capital investors (angels and venture capital funds) expect high growth and rapid exit, which are not options for a huge majority of businesses
- Complicated securities regulations place severe limits on who can invest
Strategies to Raise Capital
We have identified five strategies that allow you to raise money from both wealthy and non-wealthy investors in compliance with securities law. These are:
- Direct Public Offerings (DPOs)
- Private offerings
- Special strategies for cooperatives
- Fan-based funding (donations, pre-sales, memberships, etc.)
- Grants and public-private partnerships
There’s more than one way to raise capital, and the very first option starts with you. If you’re not willing to invest in yourself, how can you expect anyone else to? Many successful entrepreneurs put nearly all their savings into their small business, and that helps catch the eye of investors because it’s clear you’re fully committed to the project. But what if you have hardly any capital to invest?
The vast majority of the time, it’s best to wait to launch until you at least have something to offer. Getting that first round of funding is often the most difficult, and lenders want to see that you’re serious. When it comes to raising capital and approaching funders, make sure you have a POA ready to go.
Here are some of the best ways to raise capital
There’s no getting around this one. Only in very rare instances can a startup happen with a founder investing $0 of his or her own money. It doesn’t have to be a fortune and the total sum is dependent on the startup and a variety of unique circumstances. However, consider it your bid to yourself and prioritize it.
2. Family and friends
This is the one that many entrepreneurs shy away from, but it’s actually the absolute best option. Don’t worry about sounding like you’re begging or putting your loved ones in an awkward position. If you present your pitch professionally and treat them like real investors (because they are), it will go smoothly even if you’re turned down. You might be surprised by who has extra cash and is interested in supporting your dreams.
3. Banks and traditional lenders
Small business loans from traditional lenders (banks) can offer surprisingly great terms and interest rates. Of course, this depends on your credit profile and the type of collateral you can offer up. This is the reason why you need to have a well drafted business plan in place. From a traditional standpoint, this is your best bet for getting capital and you can help optimize your credit score at the same time. Plus, securing this loan helps other investors see that you’re a “real company.”
If for whatever reason you don’t qualify for a small business loan, there are oodles of crowd funding options available. Do your research and select a reputable company with a great success rate. This is a less orthodox approach, but it works wonderfully for many people in your position. Just make sure you carefully look at the terms and rates, and perhaps have a legal advisor chime in.
5. Investment companies and angel investors
This is the cream of the crop and the most difficult to secure. Some investment companies have very clear directions for pitching while others will basically come to you as if by magic. To pique the interest of these lucrative investors, it’s all about PR and marketing even at this level. You might be exactly what they’re looking for, but not if you’re not visible.