There is much to consider on the road to raising capital.
Understanding what investors are seeking, what you want from investment, and even the eligibility of your business for certain investment categories, are all major factors that will influence your final decision.
Putting your business on the best possible footing for investment also takes patience, preparation and clear goal setting.
These must be coupled with a firm understanding and extensive research of the different types of investment at your disposal, since traditional methods such as a bank loan are no longer the only viable method for a company looking to raise capital.
Raising capital through crowdfunding involves capital being sourced from many individuals, and leverages modern easy access to investment through the ever-increasing power of social media and crowdfunding websites.
This creates and connects a network of entrepreneurs and investors to one another, one far larger than might be expected from more traditional capital raising.
The conventional means of crowdfunding is called ‘Equity Crowdfunding’, whereby you sell a small piece of your business to an individual or group of investors and they provide the financing for you in return.
Another important type of crowdfunding to highlight is ‘Debt Crowdfunding’; borrowing small sums of money from a large group of individuals, rather than taking a loan from a bank, for example. This debt is then paid off over time as your business grows.
A key takeaway is that whilst crowdfunding can provide your business with quick access to capital, it needs a solid marketing strategy and promotional push to be a success, while also requiring you to be overly transparent about your business to a far wider audience than through traditional investment.
Commercial Loan/Traditional Business Loan
Commercial loans are granted to a wide range of businesses, frequently to assist with short-term financial needs when growing. This may include operating costs, rent, and services such as power and maintenance, basic equipment, staff costs, and any other short-term/start-up financing.
These loans will be tied to a fixed interest rate and come with a repayment plan provided by the financial institution. As a result, many traditional business loans require the recipient company to have an established credit history and a guarantee to secure the loan.
Angel Investors & Venture Capitalists
Angel investors are individuals who have a relatively high net worth and use their funds and resources to raise and support developing businesses. However, be aware that investors this desirable will typically have the luxury of choice when deciding on what businesses they invest in. So, if your business lacks an attractive USP or innovation, an angel investor might take their investment elsewhere.
Venture capitalists are like angel investors in that they use their own finances to fund small to medium-sized businesses, but they will come with requirements for that funding.
These may range from a seat on the board of directors, owning shares in your business, and having an input on the processes that keep your business running.
Additionally, there are entities known as venture capital firms, groups of individual investors who pool their wealth to enable higher levels of backing. They typically seek out businesses in high-growth industries, so as to reap the biggest potential rewards from their shared investments. While venture capital firms do tend to have a more hands-off approach than individual venture capitalists, they are also just as likely to attach interest to any money being borrowed from them.
An institutional investor is a company or organization that invests money on behalf of other people. Mutual funds, pensions, and insurance companies are good examples of this. Institutional investors often trade significant blocks of numerous different types of securities and therefore are considered the whales on Wall Street.
They are also seen as more sophisticated than retail investors and, occasionally are less bound by regulations because it is assumed the institutional crowd is more knowledgeable and better able to protect themselves.
So, companies seeking investment have a far greater choice than before but must still be meticulous in their research and decision making in order to make the right call for their business, particularly if it’s the critical early ‘sink or swim’ stages.