Growth is a primary goal for all small businesses. Some will grow immediately and organically through word-of-mouth or with the help of a self-funded start-up budget. For these types of businesses, you may eventually need to raise funds to help support your growth and cover the costs of additional product, supplies, and/or equipment. Others will need to raise funds right from the start to help launch and cover marketing, product, and/or staff costs.
Either way, when it comes time to raise capital, you’ll want to understand the options available to you. The following avenues are the most typical options small business owners use when looking to raise funds.
Traditional Bank Loans and Small Business Administration (SBA) Loans
Raising funds from a traditional bank or getting an SBA loan can be a challenge for small business owners. An SBA loan is government-backed. In this case, the government does not lend the money — it simply guarantees the loan, and the money comes from a bank. Both types of loans typically require collateral to back the borrowed funds, and they often want to see established revenue as well as high revenue numbers. In addition, personal and business credit requirements can be strict.
The main difference between direct bank and SBA loans is that the SBA loan requires more paperwork; however, the terms of the loan tend to be more favorable to the borrower. SBA loans also take longer to get approval because they require more information during the application process.
If your business is well established with credit history and collateral, these types of loans would work well for you. If not, then it may make sense to explore other options.
Venture Capitalists (VCs)
Venture capitalists are investment professionals who seek a high rate of return, as well as equity in your business, in exchange for funds. Most VCs operate as investment firms. Venture capital is often turned to when small businesses do not have the necessary collateral and/or revenue numbers that are required by a bank. Because businesses of this nature are higher-risk investments, the VC will seek a higher return and ask for equity to balance the risk. This type of investment option is still challenging to land. If you have a promising venture, however, and you’re willing to give up considerable equity, it can be worth a shot.
One of the main benefits to raising funds through a venture capitalist is that it often provides expertise and guidance to help you plan and manage your operations. Keep a close eye on your business, however. VCs are often looking to turn a buck as quickly as they can, and the longevity of your business, and your participation, is likely not a priority for them. Their primary goal is to make money. If they have controlling interest, they may be able to move the business in any direction they see fit.
If you decide that going after a VC to raise funds is the right move for your small business, you’ll want to create a long list of firms to approach. There are a variety of list types available online. Although some VCs will provide funding for promising businesses nationwide, most prefer to invest close to them. The typical small business is likely not an ideal candidate for the larger VC funds out there, like Kleiner Perkins Caufield & Byers, Sequoia Capital, Bessemer Venture Partners, and Polaris Partners. Consider smaller firms that will be more willing to engage.
If you’re reaching out to venture capitalists to raise funds, you’ll be well served to do your homework and develop a pitch that contains significant detail. Before going in, you should know how big their fund is (you don’t want to be asking for more than their fund is worth), how much knowledge or expertise they have in your industry (so you can tailor your pitch accordingly), and the stage of their life cycle (a fund in its early stages might be more willing to write a check than one that’s near the end of their life cycles).
If your current numbers are strong, let them know early on. If your numbers aren’t so hot yet, you can instead explain the problem your business is trying to solve. Know your numbers forward and backward, and explain why your company will continue to be, or will be, profitable and what it can do to help customers.
The main differences between an angel investor and a venture capitalist is that angels are typically individual investors who put up their own money. They are also more likely to take on smaller, early-stage ventures that are looking to raise funds under $1 million.
Either way, like VCs, angel investors will be looking for equity and will require a well-thought-out business plan that shows potential. Since angel investors tend to be individuals rather than firms, your pitch will have to be even more effective to give them enough confidence and trust.
You can find angel investors in a variety of ways, from websites to angel investor conferences and summits. Do some research to find out what the investor’s process and criteria are when evaluating investment opportunities.
Know your numbers: how much capital you’re looking for, how much equity you’re comfortable parting with, profit margins, etc. Be ready to answer questions at the end of your presentation, too. Other than numbers, you should also know the operational ins and outs of your business.
Your small business is your pride and joy. Maybe you don’t want to part with equity, or the idea of going to multiple pitch meetings is unappealing. If that’s the case, there are other ways to raise funds for your small business.
First, consider drawing on your savings account, retirement accounts, home equity, or even credit cards. You’re taking a risk, but putting in your own funds can help you down the line if you need additional money from an investor. It will show that you’re confident in the success of the business.
If you want to avoid loans but want to have funds on hand, you can always take out a line of credit. This way, you aren’t borrowing money unless you need to, and it will be available if you have an emergency that requires cash.
There may be a time when your small business does not have to worry about how to raise funds. In the meantime, there are options available to help get you started or to keep you afloat financially. Explore the ones that work best for you; if it’s an investor, know your numbers and show your value. If you go it alone, remember there will be risk, but the reward could be well worth it.