Why do businesses need to raise capital?
Businesses need to raise capital to have the finances to do the following:
Cover startup costs
Startup costs can vary significantly, depending on the type of business. For example, if you’re planning to open a restaurant in Sydney, you’ll need $100,000-$300,000, just for the kitchen fit-out.
If you need help calculating startup costs, the Australian government business website offers a startup costing template.
Grow your business
Even after you’ve established your business, you should continue raising capital if you plan to grow. Some costs you may need to prepare for include:
additional space
new equipment
recruiting, hiring and training
salaries and benefits
professional services, such as accounting
advertising and marketing
Survive tough times
Plan to have enough money in savings to cover 3 to 6 months of business expenses.
What are the options for raising capital?
There are many ways that businesses can raise capital, including:
Accelerators
Business accelerators are programs that offer mentorship and funding to support startups and grow small businesses.
Angel investing and venture capital (VC)
Angel investors are individual investors looking to fund businesses, usually in exchange for a stake in the business. Venture capitalists are investment firms using pooled funds to invest in businesses and will look for opportunities with the potential to generate a significant return over the short to medium term
Crowd-sourced equity funding
This method of raising capital — also known as equity crowdfunding — lets businesses solicit up to $5 million per year in funding in exchange for business shares. Individual investors may contribute as little as $50, up to $10,000 per year, or more than that if they’re wholesale investors.
Family and friends
While family and friends could be a good source of capital, it’s important to understand what, if anything, they expect in return. Some entrepreneurs use crowdfunding platforms to solicit donations from friends and family. The benefit of doing so is that these platforms put expectations in writing.
For example, entrepreneurs may explain that donors will receive a prototype product, a future discount, or a social media mention in exchange for their contribution.
Grants and loans
The government offers a number of grants for new and established businesses. Loans are another source of capital but require careful research — variable interest rates can cause loan payments to fluctuate, which makes financial forecasting a challenge.
How to be successful at raising capital
Give yourself the best chance of securing the funding you require by doing the following:
Educate yourself
Research all of your options before choosing a method of raising capital. Talk to industry peers about how they’ve raised capital, or ask trusted mentors for advice.
Research potential investors and connect with them in person or online
If you’ve found potential investors, research what type of companies they’ve previously backed to understand whether your business might be a good fit for them. Connect with them via LinkedIn to learn more about their interests and values, and look for opportunities to meet them in person. For example, conferences and fundraisers can be great opportunities for connecting with investors.
Create a pitch deck for potential investors
Investors may appreciate your enthusiasm, but what they’re most interested in is your plan for making money. Prepare a pitch deck — a presentation that helps investors to understand your business, and use charts and graphics to illustrate key concepts. Use sources and data to support your points.
Manage your finances with MYOB
No matter where your funding is coming from, keeping track of your finances is vital. Without a solid understanding of how much cash you have coming in — and how much you owe others — you simply won’t be able to plan for the future.
MYOB’s business management platform automatically stores all this info (and much more) in one place, giving you a comprehensive overview of your cashflow at all times.
Want to learn more? Get started with MYOB today.
Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.