Growing your business is exciting, but there can be times when client revenue and business savings aren't enough to support your expansion plans. Perhaps you need to purchase new machinery or property, enter new markets, or expand your product offering. When access to capital is starting to restrict growth and your ability to leverage new opportunities, it may be time to consider raising funds from external sources.
"We had been building our business and software for a number of years without any investment," says Doug Ayres, Co-Founder of Filament AI. "There came a point where we could see that if we were going to really grow the business, we needed to invest more in our product roadmap and go to market. The revenues the business was bringing in were not enough to support our three-year plan."
Let's take a closer look at how to raise capital for business growth, the different options available and how to know when it's the right time.
Why raise business capital?
Raising capital can support your business in many ways. This includes improving cash flow for day-to-day working capital needs like salaries and paying suppliers, to fuelling growth by allowing you to take advantage of opportunities as they arise, such as the ability to fulfil more orders, buy new machinery or even acquire another company.
Evette Orams, Managing Director of commercial finance broker Hilton-Baird Financial Solutions, says business owners should be alert to some of the key signs that it is time to raise additional funds.
“When managing cash flow becomes something that needs additional thought, or a business is unable to be agile because of a lack of funds, these are generally good indicators that it would be worthwhile exploring external sources of finance,” she says.
Ayres says he knew it was the right time to raise capital once Filament AI had several clients paying for multi-year licenses and services. Having this proof of traction with the market made raising money much easier, he says, because some investors will look for this before considering an investment into your business.
Starting the process of raising capital for your business can be a challenging decision. If your funding requirements are still relatively small and short-term, it might not be the optimal moment to begin exploring broader investment avenues.
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Types of capital raising:
Debt raising
Pros
Debt financing includes business loans, overdrafts, credit cards, debt crowdfunding, and borrowing from personal contacts. Its benefit is maintaining complete ownership and control of your business. It's often easier to access than equity financing and the interest on business loans can sometimes be tax-deductible.
Cons
Some debt finance options such as loans can leave the business committed to repaying the loan capital and interest over a fixed period. Lenders can also increase their interest rates during the lifetime of a loan, leaving you exposed to higher payments you may not have budgeted for.
Raising capital for a business can be time-consuming and may mean you have to give away a chunk of hard-earned equity in your business. At the same time, you may only need a small amount over a short period.
Equity raising
Pros
Equity financing options like angel investment, private equity and crowdfunding involve giving away a share of your business in exchange for funding. They are a way to raise capital without loading additional debt onto the business.
Equity investors earn a return through your business's profits and also provide valuable expertise and access to networks due to their shared ownership. It is therefore crucial to choose the right investor for your business.
Cons
Raising equity means you have to sell shares in your company, relinquishing some of your ownership in the business and therefore a certain amount of your decision-making power.
How to raise capital for a business
Start early
Start raising capital before your business desperately needs the money, as this will ensure you have plenty of time to find the best option, without the pressure of needing to secure funds quickly. "Starting early will open the door to a much wider range of avenues for your business," says Orams, "whereas delaying and waiting can restrict the options available."
Revise your business plan
“We had a solid business plan for the next five years, showing the specific areas of the business where the capital will be used and we had a number of years of accounts to show the growth of the client base,” says Ayres. His plan encompassed both the total addressable market and the specific market share his company aimed to capture. “Make sure your model isn't overly complicated - show the plan clearly and how you are going to achieve the numbers realistically,” he says.
Update your financials
Ayres advises organising all essential financial documents, like cash flow statements, forecasts, balance sheets, and income statements. Ayres and Orams highlight the need for transparency with investors and providing current information promptly when asked.
Leverage your network
Tap into your existing network. Seek advice from other business owners, ask for introductions, attend industry-related events, and follow potential investors on social media. You may even have clients who are keen to invest. “Our product serves private equity clients and we managed to leverage our network in the space to find a willing participant in the raise,” says Ayres.
Use a broker
“To save time and for ease of access to the right facilities, working with a good broker can be invaluable,” Orams says. She recommends using a broker that is independent, experienced, regulated by the Financial Conduct Authority, and affiliated with organisations including the National Association of Commercial Finance Brokers and UK Finance.
Weigh costs against the upside
"Think about the cost of finance in relation to the value it could bring to your business. For example, if the cost of funding is 1% but you add 3% to your bottom line, that is good-to-great value," Orams explains.
“Far too often, we see decision makers who have previously made less-than-ideal choices as a result of being hyper-focused on the cost,” she says. “They’ve missed the bigger picture and ended up buying the cheapest facility on offer, which then hasn’t met their needs and ended up costing them,” she adds. Consider how you can cover the cost of the right facility through the upside it could generate.
What’s the best strategy for your business?
The best option for your business depends on many factors, such as your current and future needs and the reasons you require funding. If you just want to raise money and are confident in your company’s future performance, Ayres says you may want to consider debt raising.
However, if you are looking for investors that add value beyond cash, then you need to spend time meeting lots of people and getting to know them, he says. “Understand what they bring to the table - be it a network or valuable previous experience.”
By really considering who you want as an investor - and starting the process early - you can ensure you find the right financing option for you and your business.
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