Grow Your Business

8 Effective Ways to Raise Capital for Your New Business

There are effective ways to raise capital for your new business that you don't know about. You are not alone! Getting the needed funds to get his ideas off the ground is every aspiring entrepreneur’s nightmare – well may be not all. 

If you happen to be a beneficiary of a large inheritance, you probably will not have any difficulty raising capital for your new business.  For majority of others, however, finding the initial money to finance their business ideas is not as easy as having the idea in the first place.

If you plan to get people to put money in your business as investors, you will need to work really hard at it to be able to convince them.  This will involve writing a convincing business plan, making persuasive presentations and a number of substantial pitches. 

Unfortunately, there are entrepreneurs who are able to do all these but their problem is that they do not know where to showcase their business ideas for financing. If that is you, then this post, 8 Effective Ways to Raise Capital For Your New Business is just right for you.

I will like to state from the onset that some of the sources of financing highlighted here have stringent rules and you must work hard to qualify to access them.  You will also have to evaluate the impact a particular funding source will have on your business  before you decide to explore the options.

8 EFFECTIVE WAYS TO RAISE CAPITAL FOR YOUR NEW BUSINESS

#1. Family and Friends

This is perhaps the easiest option by the book.  If you have rich parents, uncles, aunts or friends with extra money to spare, they can be a cheap source to raise capital, particularly if they believe in your dreams and are willing to support you achieve that dream.   Some of your family and friends will gladly give you money free of charge if they love and wish you to succeed in business, a lot of others will give you money as soft loans on very liberal terms.

The business community has stories of successful entrepreneurs who began with seed capital provided by their family members and friends.  The richest man in Africa, Aliko Dangote, for instance, started trading in commodities with the sum of N500,000 (US$1,377 at today's exchange rate) from his maternal uncle who was himself a wealthy business man at the time.

However, you have to be very careful the way you take financial helps from family and friends if you don’t wish to have problems with your relationships with them. The hazard of borrowing money from friends and family members is high so also is the reward when you become successful and carry them along.

#2. Get a Business Partner

If you don’t have the required capital to finance your start up, you can resolve the challenge by sharing the burden with a partner who will contribute part of the capital. The partner will not only come with his portion of the seed capital but also with his experience, knowledge, expertise, social network and all that he can bring to ensure the success of your start up.  

However, being in partnership means that you are no longer the sole owner of your business.  Your partner becomes an integral part of the business, may take part in its running  or at least in taking critical decisions as well as share in the profits.

It is not also very easy in choosing a partner.  Not everyone who has money can be helpful in your business so you will need to do proper due diligence in selecting a partner to do business with.  See it like a marriage, if you have a spouse whose goals are in variance with yours, the marriage will likely collapse.  So it is with business.

One way to avoid issues is to have a well crafted partnership agreement where roles are defined, profit sharing formula clearly spelt out and possibly insert and agree on exit strategy for the partner.  In this case, provision can be made to empower you to buy your partner out after a given period of time.

Seeking a business partner is an easy way to finance your business idea if you are properly guided. 

#3. Crowd Funding

This source of business capital; especially for startups is gaining popularity ever since Michael Sullivan coined the term in 2006.  Simply put, cowd funding  the provision of funds for a business by a large number of people through an organized platform, usually online.   

Crowd funding websites now offer unique opportunities for entrepreneurs to get money to fund great business ideas. Some are equity based which help raise equity investment for projects, some are reward based, which allow the beneficiary of the funds to offer some rewards to investors.  There are lending crowd funding platforms which help raise loan capital while Donation based crowd funding allows individuals to contribute to a project ex-gratis.

If you have a sound business idea, try raising funds through crowd funding.  Take your time to research the best crowd funding websites websites available, understanding their rules and package your project in line with their requirements.  A growing number of Nigerian startups  have raised substantial amount of capital through crowd funding websites such as Kickstarter.  Ourcrowd and indiegogo are some of the other crowd funding siteswhere you can get started.                                            

#4. Angel Investors

The Angel investment community is another source funding available to startup entrepreneurs. Angel investors are usually wealthy people that set some money aside to provide long term equity for viable projects.  The trend nowadays is for a collection of these wealthy people to come together in what is known as Angel Investor Network for syndicated investment in big projects.

If you are able to attract funding from an Angel Investors Network, you will get much more benefits than just the financing.  Since Angel Investors are likely to be successful business people or corporate icons, they are able to provide you with valuable advice and guidance to help you build a successful business.

To get angel investment into your business, visit the website of the angel investors network of your choice, create your profile and post your pitch, interested investors read your posts and get in touch with you, you negotiate terms and sign the papers.

#5. Start Up Incubators

Also known as start up accelerators, these are organizations that collaborate with other organizations, individuals and public institutions to provide a cocktail of assistance to start up businesses.  The help are usually in the area of financing, training and mentorship.  They select beneficiary based on competitive processes which may include pitching, business plan writing and thereafter put shortlisted candidates through a training processes.  Successful candidates are then given some level a funding in form of grants. Start up accelerators such as Ycombinator and Techstars can be helpful places to get started.

In Nigeria, The Tony Elumelu Foundation is one such startup  incubator that has helped a good number of aspiring entrepreneurs across Africa achieve their business goals with funding and mentorship.  The Co-creation Hub is another of such incubator in Nigria.

#6. Venture Capital

Venture Capital organizations also assist early stage business or businesses desiring growth with required funding.  Venture Capitalists provide funding in form of equity or debt, structured in line with the recipient needs.  Venture Capitalists usually inject huge funds in the target business and as such will normally require a seat on the board of the company and in some cases senior management position.  This is done to protect their funds which are normally retained in the organization for a specific period of time.  An example of VC in Nigeria is Echo VC Partners.  Venture Capital conduct long due diligence and viability studies on businesses they invest in. So you have to be on top of your game if you want to consider VC funding.

#7. Government Funding Schemes

There are a number of governments funding schemes designed to assist entrepreneurs with capital at friendly interest rates. Some of these schemes are managed by the Central Bank of Nigeria, others are under the supervision of Bank of Industry, yet other others are being management the Ministry of Finance and other development agencies. Some of the schemes in existences now are the Micro, Small and Medium Enterprises Development Fund (MSMEDF), the Youth Enterprise in Agriculture Programme (YEAP), the YES project and SMEDAN funding scheme.

Unfortunately, due to ignorance,  few small business operators access these intervention funds that are available for virtually all category of enterprises such as agriculture, textile and garments, cottage industry, energy and power, automotive industry and so on. These funds are very good alternatives to bank loans which in any a case are hardly available to SMEs due to stringent lending requirements that banks and other financial institutions will want borrowers to meet.

Why not  take steps to access them today.  They are cheap, less stressful and usually of longer tenor providing you with adequate time to utilize the funds and repay with minimal interests. 

#8.       Join a Cooperative Society

Many entrepreneurs are yet to realize the power of Cooperative Societies in spite of the fact that this kind of business organization have existed for centuries.  Cooperatives are voluntary organizations which exist to help members achieve collective and individuals goals.  There are cooperative for farmers, artisans, traders, financial services providers, professional people, name it. 

Cooperative Societies usually pool resources together to assist members in need and when it comes to accessing business capital from funding agencies or even commercial banks and other financial institutions, the power of cooperative arrangement make it easy for these organizations to get money for the benefit of their members.  Lenders are comfortable dealing with groups than individuals.

Your Cooperative can help you raise capital for your business.  If you need funding, find a Cooperative related to your industry and join today.  You will .be happy you did.

Final Words

You would have noticed that I did not include loans from commercial banks and other financial institutions in my 8 Effective Ways to Raise Capital for Your New Business.  This is deliberate and for two reasons: I usually do not advise SMEs to run on borrowed funds from financial institutions due to the high interest rate environment that is prevalent in Nigeria. 

Bank loans are also usually short-term and  are best suited for working capital financing.  Using bank loan to fund your equity needs  will put your business under pressure in its formative years.  What you need for your new business is stable long term  funding that will allow you  do proper planning and grow organically over a period of time. Such funds are usually in form of equity investment, structured debt capital or grants. 

Nigerian banks are also reluctant to fund start ups due uncertainties surround their survival and even for mature business financial institutions may still be reluctant because many small business operators fall short of banks lending criteria as a result of poor structure, lack of institutionalization and the need for collateral amongst other reasons.

The sources highlighted in this post can provide you with such stable long term funding for your business.  Spend time to do some research on how you can explore some of these opportunities to deliver that business idea or grow an existing one.

Good luck.

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