The 5 Keys to Success in Raising Finance for Startup Business
Raising capital is one of the toughest challenges startup founders have to overcome. Here are 5 tips to success in raising finance for your startup business:
1 – Think Through Your Decision’s Well:
There are many decisions startup founders need to think through such as:
- How much capital they need
- How long the capital is needed for
- Whether the founder will give up some ownership of their startup in exchange for the capital
- If any security can be provided
- Repayment terms such as term length, interest rates
- Fee structures and costs such as interest rates, origination fees, broker fees, premiums
The above are the most basic decisions that need to be clear before actually making any financial commitments. Look into the financial side of things well. You can read this article on Forbes on 10 Terms You Must Know Before Raising Startup Capital.
2 – Consider Your Sources:
There are so many different sources of raising finance to consider and most startup often forget that. These sources can be grouped into two categories: internal sources, external sources.
Some Internal Sources of Funding for Startups Are:
- Personal Savings: If the startup founder has access to some personal savings that can be used, they should look into this as it is a cheaper method of financing without any costs and allows the founder to keep full control over their business.
- Borrowing from friends and family: Friends and family that believe in your business and want to help you can contribute in the form of equity (by selling shares in the business) or through an amount which is to be paid back later.
- Retained Profits: Retained profits is the amount a business retained and not paid out as dividends for the purpose of re-investing back into the business.
- Shared Capital: Funds can be raised as share capital in exchange for issuing ownership in the form of shares.
- Credit Cards: Can give you enough funds to get started with but it’s easy to let debt pile up so should be used with care.
Try tapping into your own resources first and take out what you can. Investors will be less likely to put money into your business if you don’t put any into it. Investors are interested in founders that show confidence in their ventures and are willing to take some risk and put some of their money into it. You will want to show initiative in raising finance for startup business and give others confidence in joining you.
Some External Sources of Raising Money for Startups Are:
- Bank Loans: These are longer term loans for financing, generally with a low rate, but less flexibility.
- Bank Overdraft: These are more short term loans that the business enters when their balance finishes, so it is only used when needed.
- Business Angels: Angel investors are professional investors that like to invest in high growth prospects. You can meet them in person by networking at events or even find them online on various sites like Invstor, Angel, Gust.
- Venture Capital: Venture capitalists invest other people’s money into ventures they think will have a good ROI. This is a rare form of funding however, but still a possibility.
- Grants: In some countries, the government provides startups with grant money to cover the expenses of their business.
- Customers: Through pre-payments, deposits, advance sales, your customers can help fund you.
- Vendors: Many vendors allow their customers to purchase material as a trade credit wherein they can purchase without immediate payment, paying at a later date.
- Crowdfunding: Sites like Kickstarter, Indiegogo, Go Fund Me
Some things you need to keep in mind while reaching out to external sources are to avoid cold calling, try to stand out from the crowd as investors are bombarded with numerous investment pitches all the time, try working through referrals, and do a lot of networking.
3 – The First Investment Is Always The Hardest:
For most startup owners, it can take months to meet their finance needs, during which they often give up and stop seeking even if success might’ve been right around the corner. As a startup founder, don’t quit seeking finance early. The initial investment is always the toughest to get so don’t give up. It may take long, but the wait will be worth it. Persistence and negotiation is very important in raising finance for startup business!
4 – Your Credibility Highly Matters:
Your professionalism, brand, reputation and credibility in the market mean everything while seeking finance. Banks and investors will only help businesses wherein they see a hardworking and passionate founder and an opportunity for company growth. No one wants their money to go down the drain so you need to make investors have faith in you and your abilities. Also make sure your credit rating is good so the bank doesn’t hesitate to give you a loan in case you want to go that route.
5 – Calculate Your Finance Goal Very Well:
The amount you need to raise from funding needs to be calculated with care. Only add the amounts you necessarily require and cut out the ones you don’t need yet as you can always raise more capital alone later. It is advisable to raise a little more than you need but not too much. Most companies that end up raising large sums in the beginning end up as disasters later on.
Another tip is to get a mentor. Find someone that has some experience in the field you’re in and can guide you well. Also keep in mind that failure is inevitable and something you need to learn from and accept. Most startups struggle gaining initial capital and you may have to as well. But it’s all fine as long as you don’t give up. If most companies gave up during their initial days, there wouldn’t be amazing and well established companies like Facebook and Apple. So don’t lose your chance to succeed by giving up after rejections.
Those were the different ways of raising finance for startup business and 5 tips on doing it successfully. You can get more tips from this article on the Business Collective site: Raising Money for Your Startup? These 7 Tips can Help.
Have you raised capital before or going through the process of it now? What other advice can you give startup founders on raising capital? Share your thoughts, successes, (and if it happened) failures in the comments below. Everyone’s engagment as a collective will help all readers of this post grow, together.