Small businesses have to be creative when it comes to raising capital because of the inherent handicap that they lack a large market footprint. However, not all small business ventures would be constrained to the same extent, as some of them may have an excellent credit profile and strong market reputation built over a long period of time. Though the challenges related to raising capital may vary from one small business to another, the generic modes of raising money remain more or less the same.
The first and most popular option for small business owners to raise capital is bootstrapping or using personal savings to fund their enterprises. As small businesses are close to the community, getting loans from community banks, cooperatives, and micro-finance organizations is another technique. Another way is crowdfunding, a relatively modern concept for raising funds. There are sites where a small business that meets eligibility requirements may approach private investors to raise capital in exchange for rewards or equity.
Similarly, a small business owner can approach friends, family members, relatives, and other contacts to raise capital. Besides these, debt financing and equity funding are the principal means to raise funds. Debt financing can include depending on credit cards, business lines of credit, and small business loans. Here, repayment and interests are not dependent upon the fortunes or profits and losses of your business. Equity funding is when investors provide capital for your business in exchange for equity in your company.
Venture capitalists often specialize in fundraising for specific industries and can introduce you to industry contacts and potential partners. Crowdfunding sites also involve equity financing. For small revolving needs and working capital woes, a small business can always utilize a business credit card, where the owner wants to retain complete control of the company and its ownership. Very often, a small business on the growth path may seek angel investors or individuals who invest their private funds in exchange for equity or other benefits.
In contrast, venture capitalists are more demanding regarding assessment because they work on behalf of big companies. Last but not least, especially for small businesses, it would be prudent to check government projects, programs, grants, and loans explicitly meant for the sector. These can be accessed directly from government agencies or through nodal banks, foundations, charities, and private businesses that facilitate navigating red tape. In many countries, brokers or intermediaries play a significant role in helping small businesses raise funds or access capital.
Whatever path you take to raise capital, you must have your papers ready. Have a logical business plan, clear accounts and revenue projections to convince anyone to risk their money in your business. Even for government grants, you must prepare your business entity’s profile and confirm that it meets the eligibility criteria for the program. Determine how you intend to use the money and start seeking funds. Don’t let yourself be held back by a low credit score or that your business is new because unless you make an effort, you will never know about the weaknesses in your approach that need to be plugged in before you make a second try.
