Although you can certainly apply for a loan as a small business, you should expect to invest some initial capital in the business yourself because the lender will not cover all your startup costs. In addition, many lenders want to see that you’ve been in business for two years before they will consider loaning you money.
Instead of raising debt capital, you can build capital for your business without a traditional bank loan. While it can be challenging, it’s certainly not impossible. So what are some of the best ways to start building capital for your small business?
What are the Top Small Business Funding Options?
Angel Investors or Groups
An angel investor is a private investor who provides capital in the form of their own money to a new business, but for a share of the company. You may also have the opportunity to build capital from angel groups, which are just several angel investors acting as a single entity.
Since your angel investor or group will essentially become part of your business, it’s a good idea for them to have some knowledge about your field and your goals so they can guide you in making the right decisions for your business. Ideally, you would have an angel investor who is well-versed in your industry.
Role of Angel Investors
Angel investors play a crucial role in the early stages of a startup or small business. They provide not only much-needed capital but also valuable expertise, mentorship, and networking opportunities. This can be particularly beneficial for first-time entrepreneurs or those in industries where guidance and connections are essential.
Individual vs. Group Investors
Angel investors can be individual investors or part of angel investor groups. Individual angel investors use their personal wealth to invest in startups, while angel groups consist of multiple investors who pool their resources and expertise. Angel groups often conduct due diligence collectively, which can provide more in-depth scrutiny of a business opportunity.
Equity Investment
Angel investors typically invest in exchange for equity in the business. This means they become partial owners and have a vested interest in the company’s success. They share in the risks and rewards of the business, and their returns are realized when the business grows and potentially exits, often through acquisition or an initial public offering (IPO).
Sector Expertise
Successful angel investors often have experience and knowledge in specific industries. This domain expertise can be incredibly valuable as they not only provide capital but can also offer strategic guidance and mentorship tailored to the unique challenges and opportunities of the industry. This can help the entrepreneur make informed decisions and navigate industry-specific challenges.
Due Diligence
Before investing, angel investors typically conduct due diligence on the startup or business they’re considering. This process involves a thorough examination of the business plan, financials, management team, market potential, and competitive landscape. It’s important for both the investor and the entrepreneur to have a clear understanding of what’s being offered and what’s expected.
Risk Tolerance
Angel investors are generally aware of the high-risk nature of investing in startups and small businesses. They understand that a significant portion of startups may fail, and they diversify their investments accordingly. This risk tolerance is balanced by the potential for substantial returns if the business succeeds.
Exit Strategy
Angel investors often invest with an exit strategy in mind. They expect to realize returns on their investment within a certain timeframe, typically through the sale of their equity stake when the business achieves a certain level of success. This aligns the interests of the entrepreneur and the investor.
Long-Term Partnership
Angel investors aren’t just sources of capital; they can become long-term partners in the business. Their involvement can extend beyond the initial investment, as they work with the entrepreneur to help the business grow and thrive. This collaborative relationship can be a key asset for the business’s success.
Finding the right angel investor or group is often a matter of networking, attending pitch events, and building relationships within the startup and investment communities. The right investor not only brings capital but also shares the vision for the business and can contribute to its growth and development.
Crowdfunding
If you have an idea for a business and need to raise capital without strings attached, crowdfunding may be an option.
Crowdfunding generally is most successful for those who already have a lot of connections or a large social media presence in addition to a solid business idea or a moving story that will encourage people to contribute.
A successful crowdfunding campaign can also be an indicator of how much people want to see your idea become a reality. This means the success of your crowdfunding can show you how your business has the potential to grow in the future.
Crowdfunding offers entrepreneurs the opportunity to secure financing without giving up equity or incurring debt. This sets it apart from traditional sources of funding, such as venture capital or bank loans, where ownership stakes or repayment obligations are often involved. This appeal lies in the fact that entrepreneurs can maintain full control of their business.
Building a Community
Crowdfunding isn’t solely about raising funds; it’s about cultivating a community of supporters who share a common interest in the project. Contributors are typically motivated by factors beyond financial returns, including a shared passion for the venture, a belief in the creator’s mission, or a desire to participate in something innovative.
Leveraging Networks
Successful crowdfunding campaigns often rely on the creator’s pre-existing network of connections, both online and offline. This network can encompass friends, family, colleagues, and social media followers. Commencing a campaign by engaging with this network serves as a critical initial step. As the project gains traction, these connections can also amplify the message to their own networks, expanding the reach.
Storytelling and Transparency
Effective crowdfunding hinges on persuasive storytelling. Creators must craft a clear and emotionally resonant narrative about their project, elucidating its significance, its potential impact, and how contributors’ support will play a pivotal role. Transparency regarding the allocation of funds and providing regular project updates are key to maintaining trust and engagement.
Types of Crowdfunding
There are various forms of crowdfunding platforms, each catering to distinct project types:
- Rewards-Based Crowdfunding: Backers receive non-financial rewards, like products or experiences, in exchange for their contributions.
- Equity Crowdfunding: Investors obtain equity or a financial stake in the business as compensation for their contributions.
- Donation-Based Crowdfunding: Contributions are made without the anticipation of any financial return, typically used for charitable, personal, or social causes.
Market Validation
A successful crowdfunding campaign acts as a form of market validation. The campaign’s success indicates a demand for the product or service. This can be a persuasive signal for potential investors and partners that the business holds substantial growth potential.
Platform Selection
Selecting the right crowdfunding platform is critical. Platforms such as Kickstarter, Indiegogo, and GoFundMe have distinct rules, fees, and user bases. Opting for a platform that aligns with your project’s objectives and target audience is of utmost importance.
Campaign Strategy
A well-thought-out strategy is indispensable for a successful crowdfunding campaign. This encompasses setting practical funding goals, crafting compelling campaign materials (including videos, images, and textual content), and devising a marketing and outreach strategy to engage potential backers.
Post-Campaign Responsibilities
The conclusion of a crowdfunding campaign is only the start. Creators are obligated to fulfill their commitments to backers, whether it involves delivering products or executing the project. Maintaining transparent communication and trust with supporters is imperative for building long-term relationships and credibility.
Government-Backed Grants
Your small business may qualify for grants, such as those from the U.S. Small Business Administration (SBA). Although you will need to meet specific requirements to qualify, this is essentially money that you do not have to pay back, making it debt-free capital.
Although counting on a grant may not be the best way to build capital for your business, if you are in a specific industry that qualifies—such as scientific research, non-profit, or an educational organization—these grants may be able to help you.
Fund Your Own Business
It may be possible to use your existing resources to fund your small business—this is called bootstrapping. You can invest some of your savings, use existing lines of credit, or even take advantage of a 0% APR credit card, which would allow you to use the line of credit to fund a startup without having to pay interest on the balance for a certain number of months.
Bootstrapping your business allows you to build capital on your own terms and not owe anyone money after you start generating revenue. While it may not be feasible for every business owner, bootstrapping is a great way to build capital and cultivate the drive to see your business succeed.
Here’s an exploration of the concept of bootstrapping:
Leveraging Personal Savings
One of the primary ways to bootstrap a business is to invest your personal savings. This approach demonstrates your commitment and belief in the venture, as you are willing to put your own money on the line. While it can deplete personal savings, it provides a sense of control and ownership over the business’s financial destiny.
Utilizing Existing Lines of Credit
For those who have access to lines of credit, such as a home equity line of credit (HELOC) or a personal line of credit, these can be valuable sources of funds for your business. By drawing on these lines of credit, you can secure capital without the complexities associated with traditional loans.
0% APR Credit Cards
Another bootstrapping method involves utilizing 0% APR credit cards. These cards provide a unique advantage as they allow you to access a line of credit without incurring interest charges for an initial period, which can range from several months to over a year. This can be a strategic way to fund a startup without immediate interest expenses.
Independent Capital Accumulation
Bootstrapping empowers you to build capital independently, on your terms, and at your pace. You aren’t beholden to external investors, lenders, or shareholders. This self-reliance fosters a sense of ownership and determination to see your business succeed. It compels you to be resourceful and prudent in managing your financial resources.
Potential Limitations
While bootstrapping offers a multitude of benefits, it may not be a feasible strategy for every business owner. It requires having personal savings or access to credit lines, which not everyone possesses. Additionally, bootstrapping may limit the speed and scale of business growth as it relies on the resources at hand.
Consider Business Consulting
If you’re thinking of starting a new business or expanding your current one, schedule a consultation with Scharf Pera & Co., PLLC, today. We offer new business consulting and financial consulting in Charlotte.
