This may involve getting a bank loan or line of credit or approaching investors.
This activity is performed or led by the executive team because only the executives can obligate the business to repay a loan or investors. However, the executive team may have help from people in other departments, such as finance, to prepare necessary documents.
One of the most important things you can do when raising capital is to think through what you’re trying to accomplish and make sure that 1) you’re not raising capital you don’t need, and 2) you’re raising the right kind of capital for your business.
Raising capital you don’t need is expensive. First, there’s the time and effort you spend trying to get it, which is wasted. Second, if it’s a loan then you’ll be paying interest on money you don’t need to use, and if it’s equity you’ll be giving away more ownership and control in your company than you need to give which then means you personally will be making less money later, even if your business is wildly successful.
Raising the right kind of capital is important. Two important categories of sources of capital are loans and investments.
If you have a working business which is earning revenues and you know how to grow it but lack the capital to execute your plan, a loan is better because you get it for a limited period of time, you use it to make a lot more money than you borrowed, then you return the principal and interest and you keep the rest. In the loan category, there are secured loans and unsecured loans, and there are short-term loans, bridge loans, lines of credit, and mortgages. Secured loans generally offer lower rates than unsecured loans because you offer collateral to the lender that they can keep if you don’t pay back the loan, but that also means higher risk for you if your plan fails. You can get loans from a bank or credit union, but sometimes they decline because they don’t understand your business or you don’t have enough assets compared to how much you need to borrow. They can also take a while to approve and fund the loan. When banks and credit unions say no, or if you need money faster than their process allows (careful with this — it’s usually not a good sign if you’re in a hurry to borrow money), you can look for private lenders. These are people who are not banks, but they want to make money with lending, and they specialize in the kinds of loans banks won’t do. For this, they usually also charge higher rates than banks and usually want their money back earlier than banks do, meaning the loans are more short-term. But sometimes that’s exactly what you need and you can use these loans to get your business into the right shape that a bank or credit union might lend to you later.
Where to find business loans:
- Family and friends
- Banks
- Credit unions
- Private lenders
If you have a business idea but are not earning revenues, or maybe if you have some revenues but not enough yet to know if the business will ultimately be a success, and if you need more money than you’d be able to borrow based on the assets you have, you need an investor. An investor will give you money to start or grow your business and not ask you for interest payments every month. Instead, they will ask you for equity in your business, also called ownership shares. An investor will wait until your business is successful and then the investor will sell their shares, which will be worth a lot more in the future when your business is earning a lot of money. The investor will get their investment back and profits from whoever decides to buy those shares, which doesn’t have to be you. That’s great for being able to use someone else’s money and never having to pay it back, but it also means you might be doing business in the future with people you don’t know. For that reason, you don’t want to give away too much ownership in the business, because even if your initial investors let you run it however you want (and not all of them do that), whoever replaces them in the future might have other ideas.
Where to find investors:
- Family and friends
- Crowdsourcing like kickstarter or gofundme
- Angel investors
- Venture capital groups
When you’re found a lender or investor you want to approach, start with a conversation. You can try to “cold call” or “cold email” someone with a funding request, but people who have successfully raised money report that it’s better to start with a conversation.
If there’s interest, send the funding request. Don’t be discouraged when they decline. While it does happen that for some people the first lender or investor they approach says yes, for most people it’s not the first one or even the tenth one. Like sales, raising capital is a numbers game — assuming you have a reasonable business plan and funding request, there’s probably someone out there who would fund it for you and you need to find them using your connections or approach every lender and investor you can find until one of them, or enough of them, say yes.
See all executive activities.