How To Raise Capital For Your New Business

Starting and running a business is all about money.  You need money to bring a product or service to market.  You need money to cover operating expenses.  You need money to pay employees.  By definition a business fails when its expenses outweigh company revenue on a consistent basis.  Therefore, as an entrepreneur, there are two primary actions to increase your chances of success—reduce expenses and increase revenues.

Startup Phase

It is commonly known that a lack of adequate capital is a primary cause of business failure among a majority of companies during the startup phase.  New companies tend to run out of cash quickly.  Therefore, it is imperative to keep expenses down as much as possible during the startup phase of the company.  Do not hire any staff unless it is 100% critical to launching your product.  Do not lease an expensive office.  Try to work out of your home if possible.  If you must have an office, go cheap.  Spend as little as possible.

Build Out Projections for 6 Months

When starting a business, everything is exciting and optimism is typically very high.  Failure is not an option!  A wise business person, however, will always hope for the best and focus on making that happen, but will plan for the worst at the same time.  Build out simple projections for all of the expenses you expect to incur over the next 6 months to 1 year.  Then, add 20% of that figure because there will always be surprises along the way.

Now, you have a general estimate for how much money you need to raise to survive 6 months to 1 year without any revenue.  Once you know this figure, how can you raise this capital?  Is this something you can finance with your own savings?  Or do you need to look to outside sources?  If you cannot finance the business yourself, there are a few options.

Business Loan

You can try applying for a secured or unsecured business loan, but generally it is very difficult to secure financing from a bank or financial institution during the early stages of business development because of a lack of credit history and strong revenues.

Personal Savings

This is probably the best route to go if you can finance the business operations and still have a small financial cushion.  Of course, this all depends on your personal financial situation, how long it will take to produce income from the business, etc.  Using a substantial amount of your personal savings is definitely going to increase your personal risk.  However, the potential reward is that you will own a much larger portion of the company.

Friends and Family

This is the most common route for most startup companies.  Friends and family can be a great source of funding.  They will typically be supporting you not only financially, but also emotionally.  The major downside, of course, is what happens if the company fails?  Never borrow money from someone where it is going to irreparably damage the relationship if you lose the money.  If you default on an unsecured business loan from a debt issue company, it will be much easier to handle emotionally than if you lose your parent’s or brother’s money.

Investors

Unless you have an incredibly innovative idea, it will probably be difficult to raise money from investors during the initial startup phase of the company.  However, if you feel that your business model is solid, then you have nothing to lose.  Begin by searching for angel investors in your area, connecting with other entrepreneurs that have secured investor funds, and network.