How To Raise Capital: Options And Best Practices

Bank Loans

Bank loans and alternative business loans are both common ways for companies to raise capital. In fact, many businesses utilize business loans even if they have plenty of cash. Either they want to keep a certain level of liquidity for potential opportunities or they want to be prepared for a possible financial emergency. 

There are a variety of business loans companies can use:

SBA Loans

SBA loans are loans disbursed by financial institutions, but are insured by the U.S. government. Because of this, they come with some of the lowest rates in the industry. There are a few different types of SBA loans—such as microloans, 7(a) loans, and 504 loans—and each has a unique purpose. If you’re looking for working capital, a 7(a) loan may be the one you need. 

Term Loans

Term loans may be what you think of when you think of a business loan. Term loans are deposited in one lump sum and monthly payments are made until the loan matures. The money can be used for a variety of purposes, but how much you can borrow will depend on your creditworthiness. 

Equipment Loans

Equipment loans are unique in that they are used specifically to purchase machinery.  

Business Cash Advances

Business cash advances provide lump sums of money that are repaid in daily or weekly installments as either a percentage of credit card sales or as a fixed amount withdrawn from the business’s bank account. 

Accounts Receivable Financing

With accounts receivable financing, unpaid invoices are sold to a third party who pays up to 80% of the invoice’s value. That company then works on collecting payment from the customer(s). Once the payment is received, any remaining amount is distributed back to the company minus any fees. Invoice financing is a smart way to obtain working capital that is necessary for future projects or orders. 

Business Lines of Credit

A business line of credit is very similar to a credit card in that it is a revolving account. As the principal is paid down, those funds once again become available. It differs from a business credit card in that the borrowing amounts are typically much higher and the interest rates are usually much lower. However, unlike credit cards, business lines of credit have draw periods where funds are available, but many lending institutions will offer the chance to renew the line of credit if there were no issues with repayment. 

Because there are so many options on the market, there are business loans to suit just about any small business regardless of their credit score, income, or asset situation. 

Equity Financing

Equity financing is when a company sells ownership shares in exchange for capital. While a percentage of future profits go to the new owners, the benefit is that the company does not have to take on debt. Sometimes business owners offer partnerships, too, as part of their equity offer. When they do, they may not necessarily be seeking only capital—they may also be seeking that person’s expertise and knowledge. 

Companies looking to sell company equity will want to work through venture capitalists or angel investors, but another option is to sell completely to a private equity firm. Private equity vs venture capital boils down to how much of your company you’re willing to sell.  

Depending on the size of your company, you may even consider going public and having an initial public offering; however, to have a successful IPO, your company will need to meet certain financial requirements and show strong growth potential.

Crowdfunding

There are a few different types of crowdfunding, and, yes, the premise behind each is similar to the categories mentioned above. However, crowdfunding should be thought of as its own thing, because of the potential to reach a much bigger market. 

As a business owner, you can do the following types of crowdfunding:

• Donation-based crowdfunding
• Rewards-based crowdfunding
• Equity-based crowdfunding
• Debt-based crowdfunding

Donation-based crowdfunding is often utilized by individuals and nonprofits, but small business owners can take advantage of it, too. The benefit to doing a donation-based campaign is that any money raised is not taxed by the IRS. Of course, it can be difficult to convince donors to contribute to your campaign if your business is not philanthropic by nature.

Unlike donation-based crowdfunding, rewards-based crowdfunding is taxable by the IRS because there is an exchange of goods or services for money. However, if done correctly, it can be a great way to raise money and market your business—especially if your business is partially or 100% online.      

Equity based crowdfunding is when you sell company equity through crowd-based platforms. While you are giving up a percentage of future profits, the benefit of equity based crowdfunding is that you can reach a wider market of investors than you could through traditional equity financing. Plus, you’ll still be the sole decision maker and likely won’t have to communicate one-on-one with any investors.

Debt-based crowdfunding is essentially P2P (peer to peer) lending. It can be a good alternative to traditional bank loans if you’ve had trouble getting a business loan in the past. The downside is that you will likely have less favorable loan terms and higher interest rates and fees. 

Grants

Grants are available to small business owners, but they are extremely competitive. Unlike loans, grants do not have to be repaid, nor does any equity have to be relinquished. 

Consider looking for grants offered by your local community or state first, as well as any corporate grants that may be specific to your area. Keep track of which grants renew and when. Just because you were denied once doesn’t mean you will be denied indefinitely. 

Friends and Family

If possible, consider seeking the financial support of friends and family. Many successful small businesses have gotten the jumpstart they needed from personal relationships. To successfully do this, disclose why you need the money, how you intend to use it, and when they can expect to be paid back. To put them more at ease, you may even want to have legal paperwork prepared. 

Final Thoughts

Many small businesses don’t simply rely on one method to raise capital. To fulfill your current and future capital needs, consider a combination of the options discussed above. 
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