Growth is essential for every small business because it allows it to reach new customers, expand operations, and increase profits. However, successful development relies on capital, which may sometimes be lacking. As a small business owner, you’ve likely wondered how to raise the funds for growth. Below, we discuss a number of effective fundraising methods that vary in risk.
Bank Loans
One of the most common ways to raise the funds for growth of business is via traditional bank loans. There are many benefits of this including flexible payment terms, access to large sums of money, and competitive interest rates. However, you will need to wade through complex application processes, meet strict lending criteria, and provide collateral.
When applying for a bank loan, you’ll need to be prepared with a thorough business plan, tax returns, and financial statements. Additionally, you’ll need some sort of collateral including real estate or equipment.
Bootstrapping
Bootstrapping is a relatively risky move but one that can pay off under the right circumstances. Essentially, bootstrapping is simply funding the business out of your own pocket. If you have limited resources and wish to retain full control over the business, then bootstrapping may be the way to go.
The advantages of bootstrapping include zero interest rates to pay and no need to sacrifice business equity. However, you may need to make personal sacrifices and work long hours and your own money is at risk if the business fails.
Investing
If you’ve got a fairly large risk appetite, then investing can be a great way to raise business funds for growth. However, you’ll need to learn about different trading strategies and figure out how to manage risk. For example, steer clear of leveraged investments to avoid enormous losses not covered by your investment account balance.
A great investment strategy to explore is options trading, which involves entering into a contract to buy an asset at a later date. This locks in the price but gives you much more flexibility because you have the “option” to withdraw – the seller does not. To find out more about this potentially lucrative investment strategy, read this option selling handbook.
Angel Investors
Angel investors are individuals who back businesses in their early stages. They are extremely wealthy and have extensive knowledge of the business world. Typically, they’re looking for businesses with strong teams and growth potential. this is one of the best way to raise funds for growth.
There are many advantages to seeking out an angel investor. For example, you’ll receive the required capital as well as guidance and mentorship. However, the investor will likely require a high return on their investment and a large stake in the business.
Peer-to-Peer Lending
Also known as P2P lending, peer-to-peer lending is a type of loan from individual investors to businesses. In most cases, they take place through online platforms, which allow businesses to present their case and investors to choose businesses to back.
This choice has become popular in recent years because they’re much faster to be approved for and the criteria are nowhere near as strict as traditional banks. However, these types of loans aren’t FDIC (Federal Deposit Insurance Corporation) insured. This means that if you default on the loan, the lender’s money is at risk.
Venture Capital
Venture capital is private equity invested in companies. Venture capitalists mostly seek out companies with enormous growth and return potential. One of the main advantages of relying on venture capital is the investor’s need for speedy growth, which means they’ll offer plenty of guidance. However, you’ll most likely need to offer up a large stake in the company and promise high returns.
Government Grants
There are many government grants that award businesses working on projects that fit within current priorities. For example, if you’re working on innovating technology, protecting the environment, exporting goods and services, or creating jobs, you may be eligible.
The best way to search through current grants is through online databases or contact your local economic development offices. After finding a suitable grant, you’ll need to work through the application process, which often involves financial predictions, business plans, and other relevant documents.
If you’re applying for a government grant, here are some general tips for succeeding:
- Proofread your application. Make sure there are zero errors in the application – a second set of eyes may be a good idea.
- Be specific. Be clear about how the grant money will be used and what the desired outcome is.
- Be thorough. Fill in every section of the application and back any claims up with evidence.
- Start early. Grant applications can be time-consuming and they’re very competitive, so start the process early.
Crowdfunding
Crowdfunding is an approach to raise funds for growth that has emerged in recent years and relies on obtaining financial contributions from a large pool of backers within a community. Most funding tasks are placed through platforms like Kickstarter.
There are two main avenues when it comes to crowdfunding: equity and rewards based. Equity crowdfunding is where businesses offer backers shares in the company in exchange for contributions. However, this type of fundraising isn’t available in all countries, and it’s regulated by securities and exchange commissions.
Rewards-based crowdfunding involves businesses offering rewards to backers. This could be anything from behind-the-scenes exclusives to free products and services.
How to Choose the Right Fundraising Method?
When deciding which fundraising option is right for your business, there are a number of factors to consider. For example, the amount of money you need can influence your decisions. Low amounts can work well with bootstrapping and angel investors, whereas large amounts may call for other methods.
Other considerations to make include:
- Risk tolerance. Some investment methods involve taking on debt or risking assets, which may not suit every business owner.
- Growth timeline. Options like venture capital investments will be fast, whereas government grants and crowdfunding may be a little slower.
- Type of business. Some methods are more suitable depending on the type of business.
Raising funds for growth can be tricky, especially when there are so many different options. Some of the most popular choices are outlined above, but you’ll need to do your own research and weigh up the pros and cons.
