5 Ways to Raise Capital

As the old saying goes, it takes money to make money. Sure, you can bootstrap a new business to a certain extent. However, when it’s time to scale and make substantial investments in property and/or personnel, in most cases, outside capital has to be acquired. The million-dollar question is: how do you get your hands on that money?

We’ve got good news! There are a number of options at your disposal! This is by no means an exhaustive list, but it is a great starting point if you’re just getting your feet wet when it comes to funding a company.

Venture Capital – Venture capitalists rarely invest in start-ups. Instead they look for opportunities to partner with companies that already have a proven model. Typically, venture capital is reserved for deals that are 7 figures and beyond. In most cases, capital is exchanged for equity, royalties and/or control.

Angel Investors – Angel investors are typically wealthy individuals who believe in your idea. Sometimes they are more experienced entrepreneurs who act as mentors and advisors to the business owners they invest in. They typically invest money in exchange for stock in your company. Angel investors can cash in their shares at any point; however, most make long-term investments that grow as the company grows in value. In some cases, angel investors only require a percentage of return in exchange for some upfront cash. From what we’ve seen, angel investors tend to follow their instincts when making investment decisions and often they invest more in a person than an actual product or service.

Peer-to-Peer Lending – This is something typically arranged through an online third-party website. The website connects small business owners with individuals who are looking for investment opportunities. The owner and lender negotiate an investment rate and payback plan and then the investor sends the funds to the entrepreneur.

Traditional Loans – A bank loan is very similar to other types of investments except that you deal with a bank instead of an individual or an organization. Before receiving a loan, the business owner is required to present a business plan–something other lenders don’t always require. The plan must include a thorough description of your business prospects and the product or services being offered as well as financial projections and a plan for implementing your goals. If the bank determines there’s a viable opportunity, they’ll make an offer to fund your business.

Personal Investors – Personal Investors are friends or family members with the means and willingness to fund part or all of your business. It’s always good to think twice before entering into agreements with personal investors. Yes, it’s easier to secure funds because trust is already built. However, it can very risky to mix business with family or close friendships. And if things go south, it can destroy your relationships. If you choose to accept a personal investment, it’s important to treat it as formally as you would if the funding had come from the bank. It can be tempting to take a more lax approach to these investments because they come from people you have a close relationship with, but it is important to use a contract with personal investors just as you would with any other type of investor. The contract should include the amount of the investment as well as the required rate of return and any shareholder or ownership arrangements that are included in the agreement. Always, always hire an attorney to facilitate personal investor agreements.

Which option is right for you? Well, that remains to be seen. If you need professional council, consider calling our office so you can get a referral to a Certified Tax Coach that can help you make the best decision.

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