9 Ways To Raise Money for Your Business
Many small businesses need to raise money from time to time to fund their strategies and fuel growth.
There are many ways to secure capital, including loans, grants, and crowdfunding. It’s important to understand the different options available to find a solution that fits a business’ needs.
Here, we’ll explain how to raise money to grow a small business and drive future success.
External sources of funding for a small business
First, let’s look at how to raise capital for a business using external sources of funding.
Traditional business loans
A small business loan or line of credit can be a good first step for funding a small business. With a small business loan, borrowers can receive a lump sum of money upfront and pay it back in installments. With a line of credit, a business owner can access funds, as needed, up to a set credit limit, and pay it back over time, like they would with a credit card.
- Larger borrowing amounts are often available.
- Payment terms may be longer, so borrowers have more time to pay back their loan.
- Eligibility requirements are strict. Business owners may need to provide financial statements and a strong credit score for approval.
- Payment terms may be longer, so borrowers will continue to carry debt for a longer period of time.
A small business owner may qualify for a loan through programs supported by the U.S. Small Business Administration (SBA). SBA loans are similar to traditional business loans but receive backing from the SBA. Under the program, the SBA acts as a co-signer and will repay a percentage of the loan if the borrower defaults on their payments.
There are many types of SBA loans, including the General Business Loan Guaranty Program, export loans, express loans, and disaster loans.
- The SBA guarantees the loan, which can help businesses with poor credit history receive approval.
- SBA loans operate like traditional loans, so small business owners may be able to access larger borrowing amounts and set up longer repayment periods.
- Extensive documentation will need to be provided for approval, such as financial statements, business plans, tax returns, and profit and loss statements.
- Collateral may need to be provided.
Small business grants
There are many different types of small business grants available from federal, state, and local governments, as well as private organizations. Some grants are for specific groups, such as women, minorities, and veterans. Other grants provide assistance for reaching certain business goals, such as conducting research and providing environmental services.
- Unlike loans, grants don’t require repayment.
- With research, business owners can likely find a grant that fit their specific needs.
- Grants can have strict eligibility requirements, and their application processes are competitive.
- While grants do not have to be repaid, business owners likely will have to provide regular updates and documentation on their business progress.
Many startups use crowdfunding to raise money from community members and supporters. This involves gathering donations from people in exchange for perks and rewards. While crowdfunding campaigns can take time to set up and manage, using automated platforms can help streamline the process.
- Creates a community of potential customers and offers an avenue to gather feedback as a company grows.
- Grant money does not have to be paid back.
- Crowdfunding platforms can come with high fees and restrictions.
- Scammers and bots may target crowdfunding platforms.
Peer-to-peer (P2P) loans
Peer-to-peer (P2P) lending is when an individual investor provides an unsecured loan to a business. As with traditional loans, the borrower must pay back the money over time with interest. But P2P lending terms may be more flexible because they’re set by an individual investor instead of a bank or financial institution.
- The application process can be quick.
- Depending on the investor, a business owner may not need a strong credit score for approval.
- They may come with higher fees and interest rates.
- P2P lending does not offer the protections of a traditional bank or government organization.
Venture capital is a popular fundraising source for small businesses. Venture capital refers to financing that comes from wealthy investors and financial institutions. These investors or venture capitalists (VCs) – will seek out startups with high potential for growth. They will then provide funding and guidance in exchange for equity in the company –meaning the funds won’t have to be paid back in monthly installments. As the startup grows, the VCs receive a return on their investment.
- VCs may provide large sums of money.
- Borrowers can access expertise, connections, and hands-on support from VCs as their business grows.
- Business owners give up equity of their company and partial control of business decisions.
- It takes time for VCs to thoroughly vet and research a potential investment opportunity.
Angel investors are similar to venture capitalists. They are wealthy individuals who provide funds to startups and entrepreneurs in exchange for equity. But while VCs may invest other people’s money, or money from an investment company, angel investors typically invest their own money. As such, angel investors might offer less money than VCs.
Angel investors, for example, might be friends, family members, or people from a business owner’s professional network.
- Business owners can tap into an angel investor’s expertise, resources, and network of connections.
- Borrowers don’t have to pay back the money plus interest, as with a loan.
- A business owner gives up equity and partial control of the company.
- Finding the right angel investor can be tough. It’s all based on networking and connections.
Raising money within a business
There are also internal resources that can be used to secure funding for a small business.
Negotiating with your vendors
Many vendors and suppliers will take partial payment – or promise of payment – and deliver everything a business needs to fulfill all their commitments to their customers (sometimes called “factoring”).
- Negotiations are often free of charge.
- Business owners can make payments for raw materials closer to when they receive money for their services, tightening the gap between when they owe vendors and when they get paid by clients.
- Not all vendors will agree to this.
- Business owners may get stuck with a high “surprise” bill later.
Borrowing from other projects
Sometimes, the challenge for businesses isn’t a lack of money on hand; it’s a matter of having money earmarked for other projects. Borrowing from other projects is not a practice business owners will want to do every month, but for a one-time push, they can opt to spend less on marketing, put one of their services on hold, or reduce funding towards other projects.
- There are no interest payments because credit was not used.
- Borrowing from other projects can help business owners identify project expenses they didn’t realize they could cut.
- There could be a “hiccup” in other parts of operations that may result in unintended consequences.
- The lines of a business’ budget could get blurred.
Deciding how to raise capital for your business
While there are many ways to raise money for small businesses, it’s important to find a good fit for a business’ unique needs.
If a large amount of money is needed, for example, business owners comfortable with a long repayment term might choose a traditional business loan. Or if the business has strong relationships with their vendors, they can try negotiating their terms and setting up monthly payments.
A business owner may want to consider alternative business funding solutions, like a line of credit. A business line of credit offers access to an ongoing source of funds which can be tapped into as needed. This can offer a solution for businesses that need flexible funding as they grow.