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Whether you own a startup or are looking to expand your existing business, at some point you will need to raise capital. You have the next big idea to disrupt a niche industry or you are looking to expand your business with more product offerings and need additional office space, equipment and/or staff.
Here are three avenues to consider for raising capital to help you achieve your goals.
1. Take out a business loan
Apply for a business loan to get the financing you need. Several types of commercial loans are available to you. The type you choose will depend on the purpose of the loan and how you plan to repay it. Different lenders have different loan qualification requirements, but generally the lender will look at your credit score, business history, financial statements, and collateral. A lender will also ask for a business plan.
Here are some of the most common business loans on the market:
- Term loans: These types of loans usually come with fixed monthly payments. You decide how much money your business needs to meet its goals and how long the loan will be repaid, which can range from two years to 25 years or more. The bank will determine the interest rate for the loan and the total monthly payments, which will include both interest and principal repayment.
- Short term loan: These are small sums of money, usually repaid in 18 months or less. The approval process is faster and easier than for a commercial term loan.
- Equipment loans: These loans are available to purchase expensive equipment or other assets for your business. You may be able to secure the loan using the asset itself, eliminating the need for your business to provide any other form of security.
- Commercial real estate loans: These loans generally work like a home loan, but have broader applications and shorter terms. Instead of a 30-year repayment schedule, commercial real estate loans typically have terms 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 repaying the funds.
Related: The Basics of Fundraising for a Startup
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. Angel investors are typically high net worth accredited investors who provide funding in exchange for equity participation in fast-growing startups and are frequently involved in strategic decisions as co-owners. Less fortunate investors are also getting involved in angel investing through crowdfunding platforms such as MicroVentures, Fundable, SeedInvest, and StartEngine, among others.
If you are considering approaching an angel investor, make sure the investor shares your goals. You should also make sure that you are comfortable with a business partner who will be involved in your business. A strong relationship with the angel investor is important for the success of the business.
You should be aware that angel investors may request up to 50% ownership of your business in order to provide funding. They want to know if your business has the means to grow quickly. Angels are also interested in how your business stands out from the crowd, whether through an innovative product or service. Prepare your pitch deck and presentation to show why your target market is ready for what you have to offer.
Related: How to Get Funded: The Dos and Don’ts of Raising Capital
3. Hire a venture capitalist for funding
Venture capitalists (VCs) generally prefer investing in slightly more mature companies than angel investors, and they also want a say in the day-to-day operations of the business. Additionally, since venture capitalists are responsible for achieving specific returns for a company or fund, they prefer cash flow positive companies with proven and scalable products and companies. Most venture capitalists and funds believe that the startups they invest in have the potential to grow into large, profitable companies over the next five to ten years.
You can always choose to use your funds or your business income if you already have a small business. This approach is aptly called “bootstrapping”. Many startups start out this way and then turn to other sources such as lenders, angel investors, or venture capitalists and venture capital funding to take their business to the next level.