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Whether you own a startup or are looking to expand your existing business, at some point you’ll need to raise capital. You’ve got the next big idea set to disrupt a niche industry or are looking to expand your business with more product offerings and require additional office space, equipment and/or staff.
Here are three avenues to consider for raising capital to help achieve your goals.
1. Take out a business loan
Apply for a commercial loan to get the funding you need. There are several types of commercial loans available to you. The type you select will depend on the purpose of the loan and how you plan on repaying it. Different lenders have different requirements for loan qualification, but generally speaking, the lender will review your credit score, business history, financial statements and collateral. A lender will also request a business plan.
Following are several of the most common commercial loans on the market:
- Term loans: These types of loans typically come with fixed monthly payments. You decide how much money your company needs to reach its objectives and how long you want to repay the loan, which could range from two years to 25 years or more. The bank will determine the loan’s interest rate and total monthly payments, which will include both interest and principal repayment.
- Short-term loans: These are for smaller sums of money, typically repaid in 18 months or less. The approval process is quicker and easier than that of a term commercial loan.
- Equipment loans: These loans are available to purchase costly equipment or other assets for your business. You may be able to secure the loan by utilizing the asset itself, eliminating the need for your business to provide any other forms of collateral.
- Commercial real estate loans: These loans typically function similar to a home mortgage but have broader applications and shorter terms. Instead of a 30-year repayment schedule, commercial real estate loans typically have a term of five to 10 years and come with variable or fixed interest rates.
- Business line of credit: The lender will approve a maximum borrowing amount for your business with a commercial line of credit. You can borrow up to this amount and then again after you repay the funds.
2. Find an angel investor
Angel investors can help provide seed funding for a new business as well as funding to help an existing business grow. Angels are usually high-net-worth, accredited investors who provide funding in exchange for an equity stake in rapidly growing startups and are frequently involved in strategic decisions as co-owners. Less wealthy investors are also getting involved in angel investing through equity-crowdfunding platforms like MicroVentures, Fundable, SeedInvest and StartEngine, among others.
If you’re thinking about approaching an angel investor, make sure the investor shares your objectives. You should also ensure that you are comfortable with having a business partner who will be involved with your company. A solid relationship with the angel investor is important to the success of the business.
You should be aware that angel investors could ask for up to 50% of ownership in your company in order to provide funding. They want to know if your business has the legs to expand rapidly. Angels are also interested in how your company stands out from the crowd, whether through an innovative product or service. Have your pitch deck and presentation ready to show why your target market is ready for what you have to offer.
3. Look to a venture capitalist for funding
Venture capitalists (VCs) typically prefer to invest in slightly more mature companies than angel investors, and they also want a say in the business’s day-to-day operations. In addition, because VCs are responsible for achieving specific returns for a firm or fund, they prefer cash-flow positive businesses with proven and scalable products and businesses. Most VCs and funds believe that the startups they invest in have the potential to become large, profitable businesses in the next five to 10 years.
You can always opt to use your funds or revenue from your business if you already have a small company. This approach is fittingly referred to as “bootstrapping.” Many startups begin this way and then turn to other sources such as lenders, angel investors or VCs and venture funding to take their business to the next level.