Simple Funding Ideas: How to raise capital for your business?
Whether you’re starting a small business or expanding an existing company, you’ll need the funds to do it. Business success requires ensuring your start-up or small business has sufficient cash flow for daily operations, and adequate capital to expand.
Research by ASIC found businesses in trouble often have cash-flow, working-capital, and high-cash-use challenges. But getting those capital injections can be challenging when you’re a new or small business looking to grow. In economic downturns, it can seem even more daunting. 60% of Australian small businesses fail because of running out of money.
Basically, no matter the business model, the market, or your superlative idea, you will need to raise capital to sustain and make your business grow in-order to turn your ambition or idea into a reality.
Moving ahead, raising capital means obtaining money from investors, venture capitalists or other sources to fund your business. So, getting a little creative with your capital-raising options could be key to accelerating your business by considering these 13 simple funding ideas to raise capital for your business:
1. Bootstrapping or Personal Funds:
Bootstrapping refers to a situation where an entrepreneur starts a business with little or no financial backing or assets. Although, bootstrapping can be a difficult way of raising cash. It requires unconditional devotion to the success of the business, and personal sacrifices often arise as a result.
Your own savings or taking on personal debt could be easy ways to drive business expansion in the earliest days of your start-up. You won’t have to demonstrate your business profitability to banks and investors, and you won’t have to give away equity.
Aussie unicorn Atlassian, for example, was bootstrapped for its first eight years before raising a whopping $60 million in 2010, and a further $150 million in 2014. It listed on the NASDAQ stock exchange in 2015, and currently has a market cap of $US24.9 billion ($35 billion).
More recently, Melbourne regtech start-up Checkbox bootstrapped for two years before securing $1.77 million in angel investment to fuel its growth spurt, while Sydney HR start-up HumanForce raised $22.5 million to fuel international growth, after bootstrapping for 17 years.
2. Family and friends private funding:
This is a popular route for very early-stage start-ups, helping them get their venture off the ground quickly, with the backing of family members or close friends.
Like self-funding, family and friends likely won’t require onerous documentation and business plans to be convinced that you’re running a promising business that will give them a great return on their investment. If you have acquaintances who would make great private investors, you could also consider approaching them for a capital injection.
However, bringing issues of money and equity into any personal relationship can be complex, and it’s important to make sure the proper paperwork is drawn up professionally, and to be absolutely transparent about expectations around the investment. dTo ensure they are fully on board with your project, ensure you ask them carefully and respectfully. Communicate the risks of the business and have the agreement in writing.
3. Seed Funding:
Seed funding is a type of financing designed especially for start-ups. You approach investors with your innovative or ground-breaking concept and demonstrate how it has the potential to become profitable in the near term. Seed funding usually means the investor gets in very early in the start-up and they give you capital upfront in exchange for a stake.
Some questions to ask yourself before attempting to obtain seed funding:
- Does your business have the ability to go global?
- Are you after a loan or investment?
- What will you do with the money?
- Do you have customers?
4. Venture Capital:
One of the most popular forms of start-up funding is through venture capital. High-net-worth individuals, giant super funds, corporates and other groups invest in venture funds, which are managed by investors, who invest in start-ups on their behalf, taking equity stakes in the business.
VC funds are typically looking for start-ups with high growth potential, but it can be about more than just a return. Many VC firms also have their own specialist areas and will look for founders they can have a good working relationship with, and businesses they can add value to.
Funding rounds led by VC investment can be huge. The biggest Australian capital round in 2018 saw HR start-up Deputy raise $111 million in a round led by Silicon Valley VC IVP.
Aussie employee feedback software start-up Culture Amp also secured $53.4 million in Series D funding in July 2018, in a round led by Aussie VC Blackbird Ventures.
In 2019, we have seen some more modest deals, with Internet of Things start-up ‘GoFar’ raising $1.3 million; software start-up Curious Thing securing $1.5 million in seed funding; and, Kiwi edTech start-up Kami completing a $1.4 million raise led by Aussie VC Right Click Capital.
5. Angel Investment:
Angel investors are typically high-net-worth individuals with particular expertise or interest in a specific industry or technology, looking to make an investment in it. Often, they will be keen to contribute to the start-up’s success with skills, knowledge and contacts.
Angel investors usually means they will retain a stake in the business as well as help you with business advice. Some start-ups will rely on just one angel, but often once one reputable backer is on board, more support comes flooding in.
Sometimes these types of investors are passive and will leave the management and strategic direction to you, but either way, you typically need to have a well-established track record of growth or be able to demonstrate strong potential.
6. Sweat Equity:
Sweat equity refers to offering non-monetary rewards to those who assist you in setting up the business. Sweat equity is an inexpensive way to get the skills you need without paying salaries. In exchange for workers’ skills and time, you pay them with a stake in the business. In the early days of your small business, this can enable you to rapidly grow your business and get products and services to market without a huge amount of capital. Apple Inc. is a famous company which used sweat equity.
7. Private Equity:
If your small business is well established, you could look at pitching to private equity companies, which usually buy mature businesses. However, with this type of option, you are likely looking at giving up most if not all of your equity and giving over management control to the private equity firm.
8. Bank Loan:
If you have good documentation and a solid business model, you could have success seeking capital via the traditional route with a loan with a bank. You can max out your credit cards, arrange a personal loan, or borrow against the equity in your home or business property. As with any type of loan, make sure your business can meet the repayment requirements.
Some strategies for ensuring you can meet the repayments include:
- Borrow the right amount: Conduct an honest financial assessment of the company and go from there – there’s no point in over borrowing and being unable to repay the requirements.
- Separate business and personal finances: Separating such finances can protect your personal assets from being seized by the bank if you have an unsecured note, and you’re unable to make the repayments.
- Prioritise loan repayments: It’s not going to be easy, but you may have to make sacrifices if you’re going to repay the loan and not suffer consequences.
9. Micro-loans and Alternative Financing:
You could also finance your start-up or small business through small loans known as micro-loans, which may be offered through non-profit or development organisations, universities, or even the government. In addition to micro-loans, alternative financing also includes accelerator and incubator programs. These alternative sources of capital might offer mentoring, hands-on advice, and other resources as well as a small capital injection.
10. Corporate Venture:
A corporate venture fund is essentially a venture capital fund backed by a corporate entity such as a bank or insurance company, focused on investing in innovative start-ups in that particular industry.
The funds allow corporates to dip their toes into the innovation space and try out new technologies, while also finding potential new partners. Of course, they’re also hoping to see a decent return at the end of the day.
11. Pledge Future Earnings:
An innovative way to raise cash is to pledge your future earnings. You can commit to giving a percentage of your lifetime earnings to investors in exchange for upfront capital invested in your start-up. For example, you could get hundreds of thousands of dollars right away in exchange for, say, 5% of your future lifetime earnings.
12. Government Grants or Small Business Loans:
Government grants probably won’t give you access to large sums of capital, but the small injections or breaks could make all the difference for your small business or start-up. Smalls business loans. perhaps are not among the most common forms of start-up funding, but it is worth noting that start-ups would, technically, be eligible for small business loans.
However, it’s the high-risk nature of the business that makes this kind of funding particularly tricky, sending founders looking elsewhere for their dollars.
Look for different types of government grants or assistance, which can cover areas like marketing and sales, getting a proof of concept, and importing and exporting. Local, state, and federal grants might be available for your small business.
While you may need to devote time to getting the paperwork together for applications, keep in mind it’s well worth it as the grants usually don’t need to be repaid. An example of a government grant for Aussie businesses includes the Accelerating Commercialisation grant.
13. Crowd-sourced Funding or Equity Crowdfunding:
Crowd-sourced funding (in contrast to crowdfunding) might be a great option for getting capital in the earliest stages of your start-up. Equity crowdfunding legislation was given the green light in Australia in March 2017, allowing individuals to invest small amounts into companies for small amounts of equity.
You can solicit donations in exchange for products or investments in return for a small stake in your business. If you’re happy to sell your business idea to the general public for their investments, you could end up getting the capital you need as well as generating significant consumer interest for your product launch.
However, crowd-sourced funding exposes your business to the fickle nature of public interest, and you should be aware of the legal and tax requirements before proceeding.
Raising capital could be an essential step for growing your business, and plenty of options are available. Review your needs and preferences when determining which is the best option for you. You could end up deciding on just one capital-raising option or a combination of financing to match your requirements.
NextTech Learning is true example of an Australian home grown and owned start-up facilitating corporate training across a wide spectrum of courses and certifications delivered through extremely flexible learning modalities.
We at NextTech, understand the inherent needs of a start-up and can assist in providing some of the most comprehensive and cost-effective learning and development resources to build your business with strong foundations.