"Fundraising is going to be the death of
me!"
That's how every entrepreneur felt…
Any entrepreneur will tell you that raising money can be the toughest part of
starting your own business. While the competition for funds gradually increase each day, your chances of securing investors
significantly slims. Of course, finding an
investor isn't impossible, but one of the best decisions a business owner can
make is to find alternative means that will contribute to their financial
success.
Online research found out that over 94% of new
businesses fail during first year of startup operation (Source: Google.com),
and the known common reason is Lack of funding. Money is the
bloodline of any business. The long painstaking yet exciting journey from the
idea to revenue generating business needs a fuel named capital. That’s
why, at almost every stage of the business, entrepreneurs find themselves
asking. –How do I finance my startup?
Here is a comprehensive guide that will help you raise capital for your
business. Some of these funding options are alternatives and have been carried
out in different countries, including Nigeria.
1) Bootstrapping your start-up business: I will
start the funding myself
Self-funding, also
known as bootstrapping, is an effective way of startup financing, especially
when you are just starting your business. Early entrepreneurs often have
trouble getting funding without first showing some traction and a plan for
potential success. You can invest from your own savings or can get
your family and friends to contribute. This will be easy to raise due
to less formalities/compliances, plus less costs of raising. In most
situations, family and friends are flexible with the interest rate.
Self-funding or bootstrapping should be considered
as a first funding option because of its advantages.
When you have your own money, you are tied to
business. On a later stage, investors consider this as a good point. But
this is suitable only if the initial requirement is small. Some
businesses need money right from the day-1 and for such businesses,
bootstrapping may not be a good option.
Bootstrapping is also about stretching
resources – both financial and otherwise – as far as they can.
2) Crowdfunding as a Funding Option: I will
get contributions and investment.
Crowdfunding is like taking a loan, pre-order, contribution or
investments from more than one person at the same time.
This is how crowdfunding works –
Put up a detailed description of his business on a crowdfunding platform.
Mention the goals of the business, plans for making a profit, how much funding you need and for what reasons, etc. and then consumers can read about the business and give money if they like the idea. Those giving money will make online pledges with the promise of pre-buying the product or giving a donation. Anyone can contribute money toward helping a business that they really believe in.
Put up a detailed description of his business on a crowdfunding platform.
Mention the goals of the business, plans for making a profit, how much funding you need and for what reasons, etc. and then consumers can read about the business and give money if they like the idea. Those giving money will make online pledges with the promise of pre-buying the product or giving a donation. Anyone can contribute money toward helping a business that they really believe in.
Some of the popular crowdfunding sites in
US
3) Get Angel Investment in Your Start-up: Let me
try angel.co for angel list investors, we have them in Lagos right?
Angel investors are individuals with surplus cash and a keen interest to
invest in upcoming start-ups. They also work in groups of networks to
collectively screen the proposals before investing. They can also
offer mentoring or advice alongside capital.
Angel investors have helped to start up many prominent companies,
including Google, Yahoo and Alibaba. This alternative form of investing
generally occurs in a company’s early stages of growth, with investors
expecting a up to 30% equity. They prefer to take more risks in
investment for higher returns.
Angel Investment as a funding option has its shortcomings
too. Angel investors invest lesser amounts than venture capitalists (covered in
next point).
4) Get Venture Capital for Your Business: Let me see if companies like Uber can venture into my start-up…
This is where you make the big bets. Venture capitals are
professionally managed funds who invest in companies that have huge
potential. They usually invest in a business against equity and exit when
there is an IPO or an acquisition. VCs provide expertise, mentorship and
acts as a litmus test of where the organisation is going, evaluating the
business from the sustainability and scalability point of view.
A venture capital investment may be appropriate for small
businesses that are beyond the start-up phase and already
generating revenues. Fast-growth companies like Flipkart, Uber, etc. with
an exit strategy already in place can gain up to tens of millions of dollars
that can be used to invest, network and grow their company quickly.
However, there are a few downsides to Venture Capitalists as a
funding option. VCs have a short leash when it comes to company loyalty
and often look to recover their investment within a three- to five-year time
window. If you have a product that is taking longer than that to get to
market, then venture-capital investors may not be very interested in you.
5) Get Funding From Business Incubators & Accelerators:
Early stage businesses can consider
Incubator and Accelerator programs as a funding option. Found in almost every
major city, these programs assist hundreds of start-up businesses every year.
Though used interchangeably, there are
few fundamental differences between the two terms. Incubators are like a
parent to a child, who nurtures the business providing shelter tools and
training and network to a business.
6) Raise Funds by Winning Contests
An increase in the number of contests
has tremendously helped to maximize the opportunities for fund raising. It
encourages entrepreneurs with business ideas to set up their own businesses. In
such competitions, you either have to build a product or prepare a business
plan.
Winning these competitions can also get
you some media coverage.
You need to make your project stand out
in order to improve your success in these contests. You can either present your
idea in person or pitch it through a business plan. It should be comprehensive
enough to convince anyone that your idea is worth investing in.
7) Raise Money through Bank Loans
Normally, banks are the first place
that entrepreneurs go when thinking about funding.
The bank provides two kinds of financing
for businesses. One is working capital loan, and other is funding. Working
Capital loan is the loan required to run one complete cycle of revenue
generating operations, and the limit is usually decided by hypothecating stocks
and debtors. Funding from bank would involve the usual process of sharing the
business plan and the valuation details, along with the project report, based
on which the loan is sanctioned.
Almost every bank in India offers SME
finance through various programs. For instance, leading Indian banks – Bank Of Baroda, HDFC, ICICI and Axis banks
have more than 7-8 different options to offer collateral free business loans.
Check out the respective bank sites for more details.
8) Get Business Loans from Microfinance Providers or
NBFCs
What do you do when you can’t qualify
for a bank loan? There is still an option. Microfinance is basically access of
financial services to those who would not have access to conventional banking
services. It is increasingly becoming popular for those whose requirements are
limited and credit ratings not favoured by bank.
Similarly, NBFCs are
Non-Banking Financial Corporations are corporations that provide Banking
services without meeting legal requirement/definition of a bank.
9) Government Programs That Offer Start-up Capital
Even though experts generally agree that
finance is not the biggest problem facing Nigerian entrepreneurs, many of them
still believe that it still ranks among the first five.
Lagos State has N25 billion to support SMEs. The fund is
divided into two categories; micro and small businesses. Under the micro,
businesses can access up to N500, 000 loans with an interest rate of five
percent and a tenor of one year. For the small business category, businesses
can get up to N5 million for a tenor of three years. The criteria for accessing
the funds include: membership of a business organisation, which will recommend
the business for the loan; Lagos State tax receipt for at least six months, and
Lagos state residency card. This takes three weeks for processing.
10) Quick Ways to Raise Money for Your
Business
There are few more ways to raise funds
for your business. However, these might not work for everyone. Still, check
them out if you need quick funds.
Product Pre-sale: Selling your
products before they launch is an often-overlooked and highly effective way to
raise the money needed for financing your business. Remember how Apple &
Samsung start pre-orders of their products well ahead of the official
launch? It’s a great way to improve cash flow and prepare you
for the consumer demand.
Selling Assets: This might sound
like a tough step to take but it can help you meet your short term fund
requirements. Once you overcome the crisis situation, you can again buy back
the assets.
Credit Cards: Business credit
cards are among the most readily available ways to finance a start-up and can
be a quick way to get instant money. If you are a new business and don’t have a
tons of expenses, you can use a credit card and keep paying the minimum
payment. However, keep in mind that the interest rates and costs on the cards
can build very quickly, and carrying that debt can be detrimental to a business
owner’s credit.
