Whether you are just starting a new business or planning to grow your existing business, you need funds. To follow through with your business plans and obtain this funding, you may need to raise extra capital.
Use these tips to ensure that you make the best decision for funding your business.
Determine How Much Extra Capital You Require
The first step in raising extra funds for your business is to determine how much money you need. However, you should also take a closer look at your current finances. After you evaluate your assets and existing savings, you may find that you do not need to raise as much money.
For example, you may have equipment or other assets that you do not use regularly. Selling these assets may help cover a portion of your business plans.
Borrow Money or Find an Investor
There are two primary ways to raise capital for your business. You can go the traditional route and borrow money in the form of commercial finance, which is referred to as debt capital. Another option is to find investors to purchase equity, which is called equity capital.
When Should You Consider Debt Capital?
Debt capital is the most commonly used method of raising extra funds. With debt capital, you borrow money from a lender, friends, or family. However, borrowing from family and friends is rarely recommended.
If you plan on obtaining a loan from a bank or alternative lender that provides bridging loans, you may need to secure the loan with collateral. The equity that you use to secure the loan may come from property holdings or major assets.
For those that lack equity, an unsecured loan may be the only way to get a loan from a lender or a bank. Unfortunately, an unsecured loan will carry a higher interest rate, which costs you more over the length of the loan.
When Should You Consider Equity Capital?
With equity capital, you can sell a portion of the business to an investor. Equity capital may be the only option for those without the necessary equity to obtain a loan with reasonable interest rates. However, this requires investors.
Angel investors are individuals that look for new business investment opportunities. They often help fund businesses that are just starting out or in need of funds for expansion in hopes of a solid return.
Venture capitalists are another option for selling equity in your business. Unlike angel investors, they are often more interested in obtaining partial ownership of a business.
Besides debt and equity capital, you may find assistance through government programs for small businesses, crowdfunding, or corporate investors.
Which Option Should You Choose to Raise Capital?
If a business is not growing, it is in danger of failing. When you need additional funds to finance your expansion plans, remember these tips to raise capital.
You should first determine how much capital you need and then, select the best type of financing based on your needs. The types of money-borrowing belong to one of two categories. You can either raise debt or equity capital.
Debt capital is preferred when you have the equity available to secure a loan. With these loans, the equity is used as collateral. Another option is to sell equity in your business to potential investors.
Raising capital to fund your business is not a decision that you should make quickly. Always review your options before deciding on your next step.