5 Ways You Can Raise Capital To Start Your Small Business
The rundown on where to source capital
The process of funding a business is daunting and can seem like a huge risk, but by combing a couple of the ways to raise capital can help alleviate this fear. The five different ways to raise capital that is, money for your business are split into two main options. The first is debt which involves some form of a loan which you eventually have to pay back usually with interest. The other alternative is to use equity which is money invested and usually carries with it some form of ownership.
Raising Capital Through Equity
One of the quickest and easiest ways to raise capital for your business is by using your own money. This has the advantage of being highly accessible and quick but it comes with some disadvantages. If you are trying to open, renovate and purchase stock you may quickly find yourself over budget. Thereby, running your personal income dry. However, using your own money can be combined with other options like a partnership business structure.
Depending on your business structure it may be advantageous to take on some partners. This brings the added bonus of more capital in the form of the partner’s own money (equity) along with expertise and experience. This is still a form of equity which means the partners will usually have a say in running the business. However, how much is generally tied to how much they contribute in time and money. This can be set out in a co-founder agreement.
Crowdsourcing is otherwise known by the brands it is associated with such as Kickstarter. Crowdsourcing could be thought of as shares lite. A business might want to release a new product like a speciality drink or technological item. It comes down to setting a target of how much money to raise, setting goals along the way to release production information and more details. Finally, you will need to incentivise people to fund you. This can be done through tiered levels of rewards such as $50 which will get you the product but $80 will get you the product plus accessories. There’s an infinite amount of rewards you can come up with and viewing what other successful crowdfunded projects did is a good place to start.
A common source of equity for larger businesses can be the issuing of shares. Even as a private company you can still issue shares. Shares can be thought of as taking on mini partners. Depending on how many shares an individual has and how large each share is then they are entitled to a part of the profit. This may be through either dividends or the growing value of the share. Likewise, the more shares one has the larger the ownership in the business is. This can be set out in a shareholder agreement. Once you issue shares they are generally all the equity you receive. Therefore, each time a new share is issued it reduces the value and ownership of existing shareholders. This can be a great source of raising equity to expand your business and if you run into issues you could always check with a commercial lawyer.
Raising Capital Through Debt
Loans and Debt
The alternative to equity is of course debt. There are a variety of different loans you can choose from like short term, long term, interest only, fixed and variable. In the case of debt, there is no change to your level of ownership in the business. However, it is healthy to maintain a manageable level of debt to equity to avoid going under.
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Justin is a legal intern at Lawpath as part of the content team. He is currently studying a Bachelor of Laws and a Bachelor of Economics at UTS.