Understanding how to raise capital can make the difference between sink and swim for a business. Without it, a company cannot grow - or even begin its journey to success. However, despite the importance of raising capital, many businesses struggle to identify the best way of doing so outside of traditional secured business loans.
In this blog, the experts at Time Finance explore how to raise capital so you can find the perfect solution to help you continue with business growth. To find out more about how our flexible funding solutions can help your business thrive, get in touch with our team today.
Time Finance’s Guide to Raising Capital
Whether you're a new venture or a seasoned business, mastering the art of raising capital first involves understanding debt and equity financing. These are the two main types of capital raising that businesses can use to finance growth. Other alternatives to raising capital are explored later in this article.
Debt Financing
Debt financing (also referred to as debt raising) is when you borrow money from an outside source and agree to pay it back at a later date. Most commonly, this takes the form of a loan. Below are some examples of debt financing as a way of raising capital:
Business Loans
A tried and tested strategy for capital raising, securing a business loan involves borrowing a fixed sum of money from a bank or lender, which is repaid over time with accrued interest. Interest rates will vary depending on the type of loan you take out and the length of term you agree to.
Asset-Based Financing
ABL finance can fuel your business growth by providing essential funding whilst leveraging your existing assets as collateral. These assets can range from inventory and stock to property and equipment.
Factoring and Invoice Discounting
Factoring is a type of invoice finance solution that allows you to raise capital by accessing funds from unpaid invoices. This provides an immediate cash flow to your business, allowing you to reinvest in your growth goals - without being held back by late payments. Similarly, invoice discounting allows you to access these funds while also keeping credit control processes in-house.
Government Loans
Loans and grants from the government can be a lifeline for UK businesses struggling to raise capital. Not only can these grants provide you with the necessary support to get started, but many include mentoring support for startups and new businesses. Note that to secure a start up loan, you first need to pass a credit check.
Equity Financing
Equity finance is a way of capital raising that involves selling shares of your company's stock, either through preferred shares or common shares. Below are various examples of equity financing as a way to raise capital:
Crowdfunding
A capital raising method for the digital age, crowdfunding collects funds from a large number of people via a crowdfunding site who are interested in seeing your company grow. Not only can crowdfunding help you invest in the growth of your company, but it can also validate your business ideas; as such, crowdfunding is a popular way to raise capital for startups.
Angel Investors
Angel investors are a source of funding for early-stage companies. These high-net-worth individuals provide your business with capital in exchange for equity, while many also offer mentorship to entrepreneurs at the start of their business journey. Investments can range from hundreds of thousands to millions of pounds.
Venture Capital
Another potential investment opportunity is venture capitalists. This commonly involves a group of people (for example, entrepreneurs, product developers, bankers etc) who want to find new business owners and companies that might go public. Venture capitalists can offer your company multiple rounds of equity investment enabling your business to grow over many years.
Private Equity
Private equity firms specialise in investing in established companies, acquiring ownership stakes on behalf of institutional and accredited investors. This distinguishes them from venture capital firms, which typically focus on early-stage startups.
Other Methods of Raising Capital
Discovering how to raise capital isn’t limited to just debt financing and equity financing. In fact, there are various other ways to raise capital for your business, including:
Bootstrapping
Growing your business by using your own funds is called ‘bootstrapping.’ Many entrepreneurs favour this method of raising capital because it doesn’t rely on external debt or equity. While bootstrapping carries some risk, demonstrating your confidence in the business can be a green flag for future investors or lenders who might want to help you grow your business further.
Personal Contacts
Many entrepreneurs ask their friends and family to invest in their businesses at the beginning. This investment round is sometimes affectionately called the FFF round - fools, friends and family. While asking your personal contacts for help with capital raising might make business growth more stressful, many family members like to invest in something with a personal connection to them.
Trade Credit
Trade credit is a short term form of raising capital where one business extends credit to another. While less formal than bank loans, it usually involves terms and conditions, including interest and penalties for late payments. Trade credit is a mutually advantageous arrangement as it provides customers with credit flexibility while helping businesses expand their customer base.
Revenue-Based Financing
Some lenders may help businesses raise capital by providing financing in exchange for a percentage of future profits. This is called revenue-based financing. While the percentage of sales to be returned varies from business to business, it typically ranges between 1-5%. The repayment schedule is decided by the involved parties and can be weekly, monthly or yearly.
Raising Capital: Key Factors to Consider
When looking into how to raise capital for your business, there are several key factors to consider to determine which process is the most appropriate for your company:
Business Stage
How far along your business is in its lifecycle can determine how you raise capital. For example, early-stage companies might rely on bootstrapping or crowdfunding, while established businesses might prefer to explore loans or investor funding.
Risk Profile
The level of risk associated with your business will affect the best way of raising capital and influence the type of funding available.
Return Expectations
Since investors typically expect higher returns for higher-risk ventures, it’s important to consider the return expectations of your business.
Control
Capital raising can affect the level of control you have over your business. For example, while equity financing dilutes ownership, debt financing requires repayment with interest.
FAQS
Below, the experts at Time Finance have answered several frequently asked questions related to raising capital.
How to Raise Capital for a Startup?
Having the funds to grow is arguably the most important part of a startup. Whether you’re looking to boost production, invest in new vehicles or need help with cashflow. Three main investor types typically help startup companies with raising capital:
- Angel investors
- Venture capital investors
- Personal contacts like friends and family
How to Raise Capital for a Small Business?
Figuring out how to raise capital as a small business is essential if you want to expand your company and overcome financial challenges in the future. Below are some common methods of raising capital for SMEs:
- Investor funding
- Business loans
- Asset-based financing
Get Your Business off the Ground with Time Finance
Raising capital is an integral part of running a business, no matter the stage of the journey you’re on and the industry you’re aiming to become the leader of. At Time Finance, we offer a variety of debt financing options to help your business raise capital and grow in the right direction. To find out more about how we could support your growth plans, contact our team today.