10 WAYS TO RAISE MONEY FOR YOUR STARTUP BUSINESS
How do I raise money for my startup? At every stage of the business, entrepreneurs learn the importance of this question. Well, you have to, bills don’t pay themselves.
According to reports 9 in every 10 businesses fail during their first four years of operation. Lack of funds is the most common reason for this failure. It’s easy to imagine being the next big shot in the business world as you think of the Jobs, Zuckerbergs and Elon Musks of our century, but without funding, you can only go so far.
Everyone needs money. Startup companies need to raise money especially because the eventual growth of the business depends on it (there is a reason its called seed money). Capital is the bloodline of every business. For startups it’s the blood, heart and nerve.
There is no one-size-fits-all for fund-raising. Each option, like most things in life, is a trade-off between short-term and long-term costs, paybacks and overall ownership and control.
Here are 10 ways to raise money for your startup.
But before you get into it, ask yourself this question:
How much money do I need and how much control am I ready to give up?
1. Family and Friends
It’s also called “love money” for almost obvious reasons. They’re the most likely to want your success (hopefully you want it more). It’s also the easiest way to raise money for your startup business.
The amount of funds you raise from this group is often affected by a number of factors. Chief among them is the economic climate. Hard times equal fewer fund availability. A man who’s experiencing a recession in his domestic economy is less likely to give you money to run a startup company. The risks are simply too much.
Something else to consider is how much equity you’re willing to give for the money you need. It’ll be foolhardy to assume family or close friends won’t demand a piece of the pie. This is a decision you have to make if you don’t want to finance through debt. Business relationship with family shouldn’t be taken lightly.
On the positive side, love money comes with little or no interest, and gives your business some credibility.
The reason is simple: if your close circle believe in you and trust you with their money, strangers could too.
2. Business loans from financial institutions
With a proper business plan you can get loans from commercial institutions. These are easier to get so long as you have collateral (if applicable), credit worthiness, solid business plan and guarantors.
There are two types of business loans: secured and unsecured loan.
A secured loan requires collateral. This means if you are unable to repay, your property might be taken away by the lender. Unsecured loan otherwise have no security attached to them.
If you are unsure where to borrow, I recommend you try government-backed financiers like the Bank of Industry (BOI). Being run by the government guarantees lower interest rates on repayment than commercial lenders like banks.
There are also options of private finance institutions. While their lending process seem less rigorous, you should consider credibility.
Note that procedures for collecting loans are institution dependent.
If you think debt finance isn’t for you, try the next option.
3. Form strategic partnerships
Two good heads are better than one. There’s a truth to this saying and it isn’t only about sharing ideas.
When it comes to raising money for your startup it’s beneficial to team up with the right people. It’s a lot more than being business and technical partners, but also about having access to beneficial network of people who can prove useful in raising funds.
All this will cost you is some equity. But wouldn’t you rather have 50% equity and the benefits of synergy, than a 100% with less?
4. Angel investors
Wealthy philanthropists are in the business of giving money to startups and small businesses.
We call them Angel Investors.
Angel investors often buy equity from startup companies and expect high return (dividends) for the risk involved.
You’re probably thinking ‘what risk? ’ I’ll explain.
While you’re thinking of your amazing business idea, 100 pages business plan, incredible technical prowess and all that fancy stuff that screams I’m taking over the world, an Angel investors sees a small company that may or may not survive.
This uncertainty is the risk he’s taking by giving you money. The substantial dividend you give is his reward for giving you the money anyway.
Sadly, there aren’t many angel investors out there, otherwise Forbes’ list would be longer each year, not sporting the same names.
If you are lucky enough to find one, know that you will lose some control of your business, not just for money, but also expertise of the investor.
The saying Little drops of water make a mighty ocean is a perfect explanation for Crowdfunding. Becoming increasingly popular among millennials, this source of finance combines familiarity, social skills and your ability to sell your business/market your story.
All at no cost to your pocket or control.
Too good to be true, right? Read on.
With Crowdfunding you can raise the capital for your business without sacrificing equity or dealing with debt. You do this by appealing to your network’s generosity.
One thing I like about this option is that it takes away the awkwardness of asking for so much from a few people (with the attendant stress) and instead focuses on taking a little from many.
What are you waiting for? All you need do is publicise on your social network and give a good story that convinces people to part with money.
6. Small business grants
For a great business idea with commercial viability, the government and some private financiers are willing to part with money.
However, you need a business plan and ability to sell your idea to win grants. Win because most times you will compete for funding with other people. So consider impact and value of your business in the society and use that as a springboard.
Government grants often target startups and small businesses with socio-economic impact. Like manufacturing, export, agriculture etc.
Private financiers lean towards tech companies.
With a business grant you get some managerial advise alongside money. It’s a win situation. Your only hurdle is to outshine the competition while pitching.
7. Barter your skills
The barter system makes a comeback as a viable source of non-monetary capital.
Here’s how it works.
You offer your skills to another person who needs it and has what you want.
Say for instance you need an office space to run a computer business centre. You could find a company in need of a computer personnel or any other skill you have and trade your skill for their space. By so doing, you save on rent for the meagre price of handling your host’s needs.
Remember to have a contract ready for this kind of arrangement.
Unless you intend living rent-free forever (I hope you don’t), you should keep a business projection handy. Your barter trade should last only for as long as you need to make a profit. When you start making profits, retained earnings (ploughed-back profit) becomes your new source of funding.
8. Commit to a major customer
Sales rake-in profits and profits keep business owners happy.
But beyond making good returns, sales can also act as a good kick-start for your startup.
All this involves is developing a product for one or two customers and using their payments to run other aspects of the business.
Of course you may want a functional operation before dealing with customers, marketing and sales hassle, but jumping a step forward won’t hurt you.
Simply consider this a bonus task to buy yourself and your idea some time to sprout. Your cost is the time spent developing the product.
As a plus you’ll gain a loyal customer (if they’re satisfied) and a chance to see how your idea will do when it hits the market.
9. Business incubators
Business incubators are facilities that give a healthy environment for your business to grow. Think of incubators as a nursery. Popular business incubators are Silicon valley (USA) and Co-Creation hub (CC hub), in Lagos.
By being part of an incubator you get benefits of associates network, office space to develop your idea, and sometimes seed funding.
Incubators are good avenues for business support in terms of managerial and technical advise. Also, because they often attract influential philanthropists, they are a hive for angel investors.
The important thing to note about incubators are more often than not you may have to give up equity for support.
I hope by now you’ve given the nod to some of the options listed above. But if you’re still thinking nah, this isn’t for me there is one more option you can try.
It’s the ultimate DIY to getting the money.
If you’re currently within paid employment but have solid ideas and plan to jump ship in the future, this is for you.
But if you’re thinking your idea can’t wait till next year, then perhaps you should consider some or the afore listed alternatives.
So, bootstrapping is easy.
It’s starting your business by sole reliance on your assets as available. You could do this by saving over time and cutting back on unnecessary costs.
But just so you don’t leave all that money lying around in some bank account, consider short-term, risk free investments. Investing in the money market and fixed deposits are a good place to start. The ROI may be low, but it’s better than leaving funds idle. And try not to mortgage your future on ponzi schemes.
The business sphere is increasingly competitive. To stay afloat startups and existing business must stay creative and adaptable. Getting access to funding requires stepping away from the conventional.
Like I said earlier, the option(s) you pick is a question of what you qualify for and are willing to stake to turn your dream idea into a valuable business.
At the basic level what you have is a choice between equity finance, debt finance and getting donations. Switch it up and see what works for you.
Before you go here’s a recap of the 10 ways to raise money for your startup business.