How to Raise Money to Start a Business
Like any other budding business owner, it’s a matter of finding a way to generate capital or facing an uphill struggle. With your options ranging from traditional bank loans to crowdfunding platforms, choosing the right path can be a complex process.
Most new businesses rely on small business loans or lines of credit from a bank. This cash injection is required to both get a company off the ground and kickstart early activities.
However, like any investment, your business has to generate more money than the value of the loan. You have to make smart financial decisions right from the moment your company opens its doors.
Table of contents
- When Does It Make Sense to Start Raising Capital?
- Traditional Ways to Raise Capital
- New Ways to Generate Capital
- Level Up Your Start-Up with First Page Australia
When Does It Make Sense to Start Raising Capital?
Once you’ve produced a concrete business plan that identifies your target market, you need capital to get your business venture up and running.
The reasons for raising capital – and the amount – will be different for every business, but there’s no shortage of ways it can be put to great use.
If you’re just getting started, it can be used to lease a shop front, launch a marketing campaign or purchase inventory.
However, these funds can also be used to invest in your future, like expanding your locations or purchasing better equipment that helps to generate more revenue.
Traditional Ways to Raise Capital
There’s nothing wrong with sticking with the traditional way of raising capital, if it works for you. If you’re starting a business with no money, the time-tested approach might be the best decision for you.
A small business loan from a bank is a common way for startups to raise capital for growth. However, you must have an accurate understanding of the financing required before signing any paperwork.
Start by making a comprehensive list of every cost you can think of: company cars, initial inventory, website development, uniforms, office furniture, stationery and much more.
Then, consider any ongoing costs that must be carefully managed in the beginning: such as building leases, staff wages, electricity bills and shipping costs.
Don’t forget to consider frequently overlooked things like the cost of insurance, bank fees, marketing expenses, transport fees and permit applications.
Once you’ve determined the amount you need to borrow, use a business loan calculator to see how various loan terms, interest rates and establishment fees will impact your expected repayments.
Bank term loans are how many businesses raise capital at the start. As this type of loan is secured – meaning it requires collateral – the interest rates are lower than unsecured alternatives.
Usually, a business applying for a term loan will have to supply financial statements and business plans. With flexible terms up to five years, these small business loans can be up to $1 million and for any business purpose.
Business Line of Credit
Another common small business loan for startups is a business line of credit. If you successfully apply for this kind of financing, you agree to borrow a specific amount. However, a key benefit is that you only pay interest on the cash you end up spending.
This advantage makes a business line of credit an appealing way to generate capital, especially when compared to a term loan. You’ll have greater freedom when using the funds, plus repayment terms are typically more flexible as you can pay back lump sums without penalty.
There are other types of startup business loans that preserve the working capital of startups. For example, an equipment finance loan can be used by small businesses to get their hands on the equipment they need to grow.
Businesses typically use equipment loans to purchase cars, trucks and construction vehicles. Some banks also provide financing for essential technology, including computers, laptops, servers and point-of-sale equipment.
There are a variety of assistance programs and government grants for small businesses in Australia. If you’re struggling to generate capital from banks or investors, these opportunities can help you find the funds your business needs.
As you might expect, each grant comes with detailed selection criteria. Some grants will be more accessible to your business than others. However, this avenue is definitely worth investigating.
On the federal level, the Accelerating Commercialisation grant offers up to $1 million in matched funding, for businesses raising capital to bring new products and services to market.
Each state government also organises their own funding opportunities. For example, the City of Melbourne’s small business grant gives local startups up to $30,000 to help launch or expand their business.
Family and Friends
Many entrepreneurs want to avoid the so-called “Bank of Mum and Dad”, but the reality is that this is often the easiest way to generate capital for a start-up.
While banks and other investors might not be impressed by your business idea, your closest family and friends will always be open to your proposal.
Borrowing money from your loved ones isn’t something to be taken lightly. However, family and friends fully understand the person they’re putting their trust in.
If you choose to raise capital from family and friends, always hire a legal professional to create the paperwork that protects both parties.
New Ways to Generate Capital
If you’re ready to start raising money for your business, consider these financing options and reflect on which ones make sense for your fresh-faced startup.
Crowdfunding has helped countless businesses to get started without turning to traditional methods of finance.
Hugely popular platforms such as Kickstarter, Indiegogo and Fundly allow users to contribute to your idea. These avenues have already launched a myriad of startups to global success.
However, an effective crowdfunding campaign requires more effort than simply posting your business concept. To raise capital, you need clever marketing that captures attention, plus incentives that encourage people to contribute.
When choosing a crowdfunding platform, remember they get a cut of your funding. Each platform also has a different model that might impact how you generate capital and access the funds.
Seeking out angel investors is a sophisticated way to raise capital. These people are usually established entrepreneurs who understand the inherent risks involved, yet are willing to put faith in the right ideas.
As angel investors typically have a deep network of business connections, they may even be able to convince others to get involved with your company. But like any other type of small business loan, there are strings attached.
Angel investors often exchange their capital for ownership of equity or convertible debt. You have to be willing to make some sacrifices for the chance to set your business up for the future.
Focus your attention on forming connections within your industry, and you might uncover an angel investor who can help take your company to the next stage.
While angel investors usually invest their own money, venture capital firms control investments on behalf of individuals, businesses, foundations, funds and more.
Raising capital through a venture capital firm can give access to some eye-watching sums of cash. More than just money, they bring expertise. These professionals often also have a wealth of experience in scaling businesses in your industry.
A venture capital firm may demand a significant say in the company’s direction, to protect their investment. This might seem like a daunting request. But if you have a clear vision for your company and the confidence to convince others, taking on venture capital can be the partnership to unlock business expansion.
Taking out a small business loan or investment is the most appealing option for many business owners in Australia. If you have the skills, dedication and luck to do things your own way, bootstrapping your startup can deliver the best results.
Bootstrapping means supporting your business with your own personal funding and any cash generated from sales. As you can imagine, finding a way to navigate hurdles and generate capital is always a challenge. Yet if the business is successful, you’ll maintain complete control over their operation as the owner.
Level Up Your Start-Up with First Page Australia
Figuring out how to raise money to start a small business is a challenging prospect. But with a thoughtfully considered business plan and a clear understanding of your financing options, generating enough capital is within your grasp.
If you’re ready to get the word out to your target market, get in touch with First Page Australia’s talented team for a tailored digital marketing campaign. Also, don’t forget to check the How to start a business with a limited budget in Australia article.