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Written by: Yarrow Financial
Money is the lifeline of any business. The journey from idea to profitable business growth needs the consistent fuel of capital.
That’s why, at almost every stage of the business, entrepreneurs find themselves asking…
How do I fund my established business?
When you require funding depends mainly on the nature and type of your business. But once you have realized the need for fundraising, below are some different financing sources available.
Eight Funding Options for Established Businesses To Raise Capital.
1. Angel Investors
Angel investors are individuals with surplus cash and a keen interest in investing in growing companies. They also work in groups of networks to collectively screen the proposals before investing. They can also offer mentoring or advice alongside capital.
Angel investors have helped fund many prominent companies, including Google, Yahoo, and Alibaba. This alternative form of investing generally occurs in a company’s early stages of growth, with investors expecting up to 30% equity. They prefer to take more risks in investment for higher returns.
Angel Investment as a funding option has its shortcomings too. Angel investors invest less than venture capitalists (covered in the next point).
2. Venture Capital
Getting funding through venture capital is where you make the big bets. Venture capitals are professionally managed funds that invest in companies with huge potential. They usually invest in a business against equity and exit when there is an IPO or acquisition. VCs provide expertise and mentorship and act as a litmus test of where the organization is going.
A venture capital investment may be appropriate for small businesses already generating revenues beyond the established business phase. With an exit strategy already in place, fast-growth companies like Lyft, Uber, etc., can gain up to tens of millions of dollars to invest, network, and grow their company quickly.
However, there are a few downsides to Venture Capitalists as a funding option. VCs have a short leash regarding company loyalty and often look to recover their investment within a three- to five-year time window. If you cannot return their investment in that time frame, venture-capital investors may not be interested in investing in your business.
They typically look for larger opportunities that are a little bit more stable, companies having a solid team of people and good traction. You also have to be flexible with your business and sometimes give up a little bit more control, so if you’re not interested in too much mentorship or compromise, this might not be your best option.
3. Business Incubators & Accelerators
Early-stage businesses can consider Incubator and Accelerator programs as a funding option. These programs assist hundreds of companies annually and are available in almost every major city.
Though used interchangeably, there are few fundamental differences between the two terms. Incubators are like a parent to a child who nurtures the business by providing shelter, tools and training, and networks to a company. Accelerators are more or less the same, but an incubator helps/assists/nurtures a business to walk, while an accelerator helps run/take a giant leap.
These programs typically run for 4-8 months and require a time commitment from the business owners. You will also be able to make good connections with mentors, investors, and other fellow business owners using this platform.
Companies like Dropbox and Airbnb started with an accelerator – Y Combinator. Here is a list of the top 10 incubators & accelerators in the US.
4. Bank Loans
Usually, banks are the first place entrepreneurs go when thinking about funding.
The bank provides two kinds of financing for businesses. One is a working capital loan, and the other is funding. Working Capital loan is required to run one complete cycle of revenue-generating operations, and hypothecating stocks and debtors usually decide the limit. Financing from banks would involve the usual process of sharing the business plan and the valuation details, along with the project report.
5. Microfinance Providers or NBFCs
What do you do when you can’t qualify for a bank loan? Microfinance is access to financial services for those who would not have access to conventional banking services. It is increasingly popular for those whose requirements are limited and credit ratings not favored by banks.
Similarly, NBFCs are Non-Banking Financial Corporations that provide Banking services without meeting a bank’s legal requirements/definitions.
6. Government Programs
Small business lending funds and dedicated portals for Government grants are available for local businesses.
If you comply with the eligibility criteria, Government grants as a funding option could be one of the best. You just need to make yourself aware of the various Government initiatives.
7. Crowdfunding
Crowdfunding is one of the newer ways of funding an established business that has recently gained popularity. It’s like taking a loan, pre-order, contribution, or investment from more than one person simultaneously.
Here’s how crowdfunding works – An entrepreneur will put up a detailed description of his business on a crowdfunding platform. He will mention the goals of his company, plans for making a profit, how much funding he needs and for what reasons, etc., and then consumers can read about the business and give money if they like the idea. Anyone can contribute money toward helping a company that they believe in. Those giving money will make online pledges with the promise of pre-buying the product or donating.
Why you should consider Crowdfunding as a funding option for your business: The best thing about crowdfunding is that it can generate interest and help market the product alongside financing. It is a boon if you are unsure if there will be demand for the product. Crowdfunding also lessens the need for professional investors and brokers by putting funding in the hands of everyday people. It might attract venture-capital investment if a company has a successful campaign.
Also, remember that crowdfunding is a competitive place to earn funding. So unless your business is rock solid and can gain the average consumer’s attention through a description and some images online…
You may not find crowdfunding to work for you in the end.
Kickstarter, RocketHub, DreamFunded, Onevest, DonorBox, and GoFundMe are popular crowdfunding platforms.
8. Quick Ways To Raise Money For Your Business
There are a few quick alternative funding methods if you need capital quickly.
Also, read about Invoice Discounting. It’s an excellent way to manage your cash flow in the short term.
- Product Pre-sale: Selling your products before they launch is an often-overlooked and highly effective way to raise the money needed for financing your business. Remember how Apple & Samsung start pre-ordering their products before the official launch? It’s a great way to improve cash flow and prepare yourself for consumer demand.
- Selling Assets: This might sound like a challenging step, but it can help you meet your short-term fund requirements. Once you overcome the crisis, you can again buy back the assets.
- Business Credit Cards: Business credit cards are among the most readily available ways to finance a business and can be a quick way to get instant money. If you are a new business with few expenses, you can use a credit card and keep paying the minimum payment. However, keep in mind that the credit card interest rates and costs can build very quickly, and carrying that debt can be detrimental to a business owner’s credit.
Conclusion & Next Steps:
If you want to continue growing, you probably need outside sources of capital. If you bootstrap and remain without external funding for too long, you may be unable to take advantage of market opportunities.
While the plethora of lending options may make it easier to get started, responsible business owners should ask themselves how much financial assistance they need.
Now the big question is – How do you prepare your business for fundraising? It’s better to start with good corporate governance as it might get hard to go back later and try to exert fiscal discipline. Invest in good accounting software to address these concerns and keep your finances in order.
Related: Enhancing Advisor Digital Marketing for Better Business Owner Engagement