Business success requires ensuring your startup or small business has sufficient cash flow for daily operations, and adequate capital to expand. Research by ASIC found businesses in trouble often have cash-flow, working-capital, and high-cash-use challenges. But getting those capital injections can be challenging when you’re a new or small business looking to grow. In economic downturns, it can seem impossible.
Getting a little creative with your capital-raising options could be key to accelerating your business. Consider these 11 ideas to overcome this major growth challenge by learning about your top funding options.
1. Bootstrapping or personal funds
Bootstrapping refers to a situation where an entrepreneur starts a business with little or no financial backing or assets. Although, bootstrapping can be a difficult way of raising cash. It requires unconditional devotion to the success of the business, and personal sacrifices often arise as a result.
Your own savings or taking on personal debt (when it’s sensible for you to do so) could be easy ways to drive business expansion in the earliest days of your startup. You won’t have to demonstrate your business profitability to banks and investors, and you won’t have to give away equity.
2. Family, friends, and private investors
The next option could be family and friends. Like self-funding, family and friends likely won’t require onerous documentation and business plans to be convinced that you’re running a promising business that will give them a great return on their investment. If you have acquaintances who would make great private investors, you could also consider approaching them for a capital injection.
However, you must be careful with friends and family. To ensure they are fully on board with your project, ensure you ask them carefully and respectfully. Communicate the risks of the business and have the agreement in writing.
3. Sweat equity
Sweat equity refers to offering non-monetary rewards to those who assist you in setting up the business. Sweat equity is an inexpensive way to get the skills you need without paying salaries. In exchange for workers’ skills and time, you pay them with a stake in the business. In the early days of your small business, this can enable you to rapidly grow your business and get products and services to market without a huge amount of capital. Apple Inc. is a famous company which used sweat equity.
4. Pledge future earnings
An innovative way to raise cash is to pledge your future earnings. You can commit to giving a percentage of your lifetime earnings to investors in exchange for upfront capital invested in your startup. For example, you could get hundreds of thousands of dollars right away in exchange for, say, 5% of your future lifetime earnings.
5. Bank loan
If you have good documentation and a solid business model, you could have success seeking capital via the traditional route with a loan with a bank. You can max out your credit cards, arrange a personal loan, or borrow against the equity in your home or business property. As with any type of loan, make sure your business can meet the repayment requirements.
Some strategies for ensuring you can meet the repayments include:
- Borrow the right amount – Conduct an honest financial assessment of the company and go from there – there’s no point in over borrowing and being unable to repay the requirements.
- Separate business and personal finances – Separating such finances can protect your personal assets from being seized by the bank if you have an unsecured note, and you’re unable to make the repayments.
- Prioritise loan repayments – It’s not going to be easy, but you may have to make sacrifices if you’re going to repay the loan and not suffer consequences.
6. Seed funding
Seed funding is a type of financing designed especially for startups. You approach investors with your innovative or groundbreaking concept and demonstrate how it has the potential to become profitable in the near term. Seed funding usually means the investor gets in very early in the startup and they give you capital upfront in exchange for a stake.
Some questions to ask yourself before attempting to obtain seed funding:
- Does your business have the ability to go global?
- Are you after a loan or investment?
- What will you do with the money?
- Do you have customers?
7. Angel investors and venture capital
Angel investments and venture capital are similar to seed funding as they’re usually only available to promising startups. However, working with venture capitalists (institutional or micro) and angel investors usually means they will retain a stake in the business as well as help you with business advice. Sometimes these types of investors are passive and will leave the management and strategic direction to you, but either way, you typically need to have a well-established track record of growth or be able to demonstrate strong potential.
8. Private equity
If your small business is well established, you could look at pitching to private equity companies, which usually buy mature businesses. However, with this type of option, you are likely looking at giving up most if not all of your equity and giving over management control to the private equity firm.
9. Microloans and alternative financing
You could also finance your startup or small business through small loans known as microloans, which may be offered through nonprofit or development organisations, universities, or even the government. In addition to microloans, alternative financing also includes accelerator and incubator programs. These alternative sources of capital might offer mentoring, hands-on advice, and other resources as well as a small capital injection.
10. Government grants
Government grants probably won’t give you access to large sums of capital, but the small injections or breaks could make all the difference for your small business or startup. Look for different types of government grants or assistance, which can cover areas like marketing and sales, getting a proof of concept, and importing and exporting. Local, state, and federal grants might be available for your small business.
While you may need to devote time to getting the paperwork together for applications, keep in mind it’s well worth it as the grants usually don’t need to be repaid. An example of a government grant for Aussie businesses includes the Accelerating Commercialisation grant.
11. Crowd-sourced funding
Crowd-sourced funding (in contrast to crowdfunding) might be a great option for getting capital in the earliest stages of your startup. You can solicit donations in exchange for products or investments in return for a small stake in your business. If you’re happy to sell your business idea to the general public for their investments, you could end up getting the capital you need as well as generating significant consumer interest for your product launch. However, crowd-sourced funding exposes your business to the fickle nature of public interest, and you should be aware of the legal and tax requirements before proceeding.
Raising capital could be an essential step for growing your business, and plenty of options are available. Review your needs and preferences when determining which is the best option for you. You could end up deciding on just one capital-raising option or a combination of financing to match your requirements.
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