14 Ways to Raise Capital to Fund Your Growth

Help! I need capital to fund my growth...

If you're in need of some cash to fund your business growth, dreams and big hairy audacious goals, then keep reading.

In this edition I'm sharing with you 14 different ways you can get some funding broken into 4 categories: free sources of money, debt, equity, debt & equity blends and even some early stage options. (yep plenty to choose from!)

Now just as a disclaimer - this is just me sharing my perspective, it's a general overview of options, it is not financial advice, please seek out solid, personalised financial advice and never take financial advice from a blog!

"Free" Sources

Free sources don't involve any debt or giving up any control of your business, and nor do they require repayments! They're given in exchange for you delivering something. Like most things you need to consider the risks and rewards of each approach... read on!

1. Grants

Typically, grants are funds provided by government agencies or private foundations and are focused on helping small businesses grow. They are usually non-repayable funding, but there'll always be constraints and expectations. However, competition for grants can be fierce, and the application process can be pretty time-consuming.

2. Customer Funding

If a customer wants you to develop a product that is niche or expensive to create, using a customer funded model might be viable alternative. It works by providing some sort of exclusivity or bonus in return for them funding the product development. Pro: It's a good way to grow your products or services, while getting great customer input and feedback. Con: If it doesn't work, you can lose or have an unhappy customer on your hands.

Debt Options

3. Property Loan

Typically the cheapest interest rate you can get on any debt is an equity loan secured against your house. So if you own a home, you could use it to fund your growth (just make sure you are allowed to use the loan to fund your business first). Clearly you risk losing your home if you're unable to repay the loan, which would not be a great outcome! But lots of entrepreneurs have funded their growth in the earlier days this way.

4. Bank Loan

A standard bank loan, where you borrow money from a bank and pay it back with interest over a set period of time can provide competitive interest rates, flexible repayment terms and is often easy to obtain for established businesses. Keep in mind that banks love security so don't be surprised if they want personal guarantees and/or security over your home. Bank loans also require lots of documentation usually, so consider a broker to help you out.

Equity Options

5. Crowdfunding

This is a popular way of raising capital through small investments from a large number of people, (like customers or the potential end user) through an online platform. There is generally offering some sort of reward, premium deal or incentive for an amount given and is a great way to attract dedicated and loyal customers. However it can be difficult to attract enough backers to reach your funding goal, and funds raised may be smaller than other options.

6. Preferred shares

These types of shares often involve giving investors a fixed dividend (perhaps a higher one than common shareholders get) and priority over other shareholders in relation to proceeds from asset sales in the event of a liquidation. It provides a more stable form of equity financing as fixed dividends can be attractive to investors. But like other equity instruments, they of course dilute the equity of existing shareholders and the terms of the investment can vary greatly.

7. Employee Stock Options

Giving employees the option to purchase company stock at a discounted price means it can bring capital into the business - by having people "buy in", or they can just be used as incentives and rewards. This can be very effective in aligning your team's interests with yours, but the accounting and tax implications can be complex, if using it to raise real capital.

8. Private Equity

This is an investment made by private equity firms in exchange for an ownership stake in a company. The firms raise money often from institutional investors or high-net-worth individuals to pool into a fund, and then use that money to take generally controlling stakes in businesses. Their goal is to scale the business up and they typically exit the investment within 3-7 years. Given the timeframe focus, this can create a pretty high pressure environment as a Founder and it can be challenging to find the right kind of private equity firm but returns can be significant.

9. Joint Ventures

This is when two or more parties agree to pool their resources to pursue a specific project, both of which are providing the capital required to fund the operation based on the percentage of equity they hold. It's kind of a long-term marriage! It can be difficult to maintain control over the direction of the venture so it's important to have a calm, trusting and open relationship with whomever you partner with, as you will be pooling your resources together so alignment and good communication are key.

Debt-Equity Blends

10. Convertible Notes

This is essentially debt that can be converted into equity at a later date, usually when the company raises additional funding. The debt accumulates interest and at the end of an agreed period, you pay the investor their cash back including interest, or they can convert to equity at a discount to the valuation at that time. This can provide immediate access to cash, however interest rates would typically be higher than bank debt to reflect the risk taken by the investor.

11. Venture debt

Venture debt is usually provided by specialised lenders to Founders who've already raised equity capital, as a 2-4 year term loan with a fixed interest rate that may also have an option at the term end for the lender to purchase equity in your business. It can offer a fast-to-access, non-bank debt solution that's cheaper than raising through equity with greater flexibility and less restrictive covenants. Be mindful that interest rates are typically higher than traditional bank loans.

Early Stage Options

12. Angel Investing

This is an investment provided by typically a high net worth individual in an early-stage business. As an exchange for a stake in the business you typically can receive personal support and mentorship, and there is potential for reasonable cheque sizes. 20k to 50k per investor are common.

13. Venture Capital

Getting VC money is not easy - no matter what success stories you might have heard. Ask yourself: Have you succeeded in a similar venture before? Do you have a strong, backable team? Is there at least a $100m valuation opportunity if you succeed based on the market size? You might know your industry, but are you willing to do 80 hour weeks to make it work? Are you willing to take material personal risk to make it work? Venture capital is absolutely available but it can take a lot of time to raise money given that investor risks losing 100% of their investment. It can be challenging to find a VC who is a good fit for your business.

14. IPO

An initial public offering (IPO) is a process by which a private company becomes a public company, making its shares available to the public for the first time. If you've got a strong business with sound profitability and predictable revenues, then this can be a really interesting option to head towards. It can provide access to large amounts of capital, better liquidity for shareholders and can raise your profile but can also be an incredibly time-consuming and costly process, which requires investment bankers and other professionals.

What option makes sense for you?

Here are a few questions to ask yourself, to prompt your thinking ive you some ideas what option might be best for you.

• What are my longer-term goals for this business and how solid is my strategy to get there?
• How much do I need and over what timeframe?
• How much control am I willing to give up?
• How much risk am I willing to take on?
• What are the cost and terms of the financing options available?
• How strong is my history and projections in terms of growth and profitability?

There's no one size fits all answer when it comes to capital structures, the best choice always depends on your unique circumstances which is why talking to a CFO, your accountant and finance brokers can help you understand which choice, or blend of choices, might be best for your business.