Every business needs capital to keep going. Where that capital comes from depends on a variety of factors. There’s debt financing, which involves borrowing money and there’s investor financing, which means individuals or companies contribute funds to your business in exchange for a share of it. Raising capital for your business isn’t simply a matter of deciding that you need more money one day. There are several things to consider before you begin the process of raising money.
What You’ll Use the Funding For
One of the most important things to go consider before you start contacting potential investors or before you start exploring debt financing options is how you’ll use the funding. Think about your goals for the financing. Examine the stage your company is currently in and where you expect to go over the course of a year or longer. This is where having a strategic plan can be particularly handy. Once you have an idea of the direction you want your company to head, you can lay out how you expect the funds raised to help you get there. Be specific when detailing how your company will use the funds. For example, you might need $XX to hire a new staff member, to hire the services of a virtual chief financial officer, or to afford the higher monthly rent on leasing a larger office space.
What Mix of Financing Makes the Most Sense
Along with understanding how you’ll use the funding, you also want to have a grasp on the mix of financing that makes the most sense for your company at the moment. You can stick with purely debt financing, taking out a loan or two from a bank, then paying that money back over time. Another option is to seek out a few investors who have experience working with a company such as yours and who would be interested in seeing your business succeed. While you don’t have to pay investors back the same way you pay a loan back, when they contribute to your company they are doing so in exchange for an ownership stake. That might be fine for many people, but it can also mean giving up some degree of control in your business. You’ll want to ask yourself if you’re ready to work with investors who have a stake in your company or if you’d rather stick with borrowing money for the moment.
What the Investor Expects From You
When you create a strategic plan and map out your goals for funding, you let investors know what they can expect to gain from working with you. It’s also important to understand what an investor’s expectations are for you and your business. For example, an investor might be willing to provide capital to your company, but he or she might also expect your company to grow by X amount over the year or for your business’ revenue to increase by X percent year after year. Keeping communication open with the people who are willing to support your business is crucial at all stages of the financing process, from before someone invests in you until he or she sells the stake in the company.
How Much Money You Need
Have a strong idea of the amount of money you’ll need to take your company to the next phase or to move forward with your strategic plan. In many cases, it’s better to raise less money than you need than to raise more. If you raise more than needed, you risk setting the bar too high and disappointing your investors or being unable to repay your loan according to the terms. You can always seek out more investors or additional sources of capital if needed, but it is challenging to return money that’s already been invested or borrowed.
Using capital to your best advantage is critical for the success of your business. If you’re unsure where to start when it comes to raising funds or if raising capital is even the right choice for you at the moment, New Direction Capital’s CFO services can help. Call us today to learn more about how we can help you understand your financing options.
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