How to raise capital for your business

Do your homework:  

• The first step is to work out how much you need to achieve your business goals.
• Once you know how much you need, consider whether you can raise it yourself before you look at external sources of capital.  For example, do you have any savings (either business or personal) that you could use? If you have unused assets in the business (e.g. machinery that’s not used very often, buildings or excess stock you could shift), weigh up the advantages of selling these first.
• If raising the money yourself is not feasible, you’ll need to consider external options.

This is simply borrowing money to finance your business growth, which usually requires you to pay interest on the loan or debt. The most popular sources are:

• Friends and family. Often a first option as they are easy to approach, but take care. Owing money to people you know isn’t always a good idea as it can affect relationships, particularly if something goes wrong.
• The bank. Your bank may be able to assist with anything from short-term funding like an overdraft (e.g. for buying extra stock) to longer-term loans for new equipment or buildings. Interest rates for loans with a property as security are almost always cheaper than unsecured finance (where loans aren’t secured against a property or other assets), so consider whether you have any spare equity in your house that you could use. You might also consider asset finance, where you borrow cash over the value of an asset, work in progress or stock.

Before you approach your bank, check out our article Increase your chances when applying for a business loan for some useful tips.

This is where you raise cash in exchange for selling part of your business (i.e. you give up some of your ownership (equity) in your business. Giving up some ownership (and control) can be a hard decision so you need to think about how comfortable you are with the idea. However it may be necessary for the business to grow – and remember that you may prefer to own 40% of a business worth $2,000,000 than 100% of a business worth $150,000.

The main providers of equity capital are:

Angel investors - Angels are people (often other business owners) who think your business is promising and are willing to invest in it. One advantage of angel investors is that they’re usually keen to invest at an early stage, which can help with your start up. Another is that they often have a lot of knowledge, experience and connections you can take advantage of.

Visit the Angel Association of New Zealand’s website for an overview of angels and what they can provide.

Venture capitalists - These are investment companies or fund managers who provide cash in return for part-ownership of your business. They differ from angel investors in a number of ways:

• They’re typically looking to invest larger sums of money, so they tend to look at larger businesses
• Their requirements are much tougher
• They may not want to play such an active role in the management of your business, but typically seek a role on your board.

For more information on the venture capital environment visit the NZ Private Equity and Venture Capital Association website.

• Government grants - it’s worth checking out whether your business qualifies for government grants or other assistance – visit business.govt.nz for more information
• Corporate investors – sometimes large companies invest in smaller ones that they have a vested interest in seeing grow and expand - large customers or suppliers may be worth exploring
• Crowd funding – online capital raising forums such as Snowball Effect or Pledge Me are increasingly popular. Crowdfunding platforms are licensed by the Financial Markets Authority – check out the FMA website for more information.

Regardless of where you get the capital from, the more prepared you are the better. Use these tips to help:

• Consult with your network – an ANZ Business Specialist, lawyer and accountant are all people you should consult about finding investors. They’ll have good contacts and can help. It’s also useful to talk to other business owners who have successfully raised capital.
• Build your business case – review your business plan and make sure it’s presented well. Imagine you’re a prospective investor – would your business plan convince you to invest in your business?
• Get your financials sorted – present your actual and projected cash flow and profits. Make sure you outline your assumptions when it comes to your forecasts. (You can use our Cash Flow Forecast calculator to help)
• Get your business ready – investors want to see that your processes and systems are running smoothly, you’re monitoring your KPIs and providing an excellent customer experience, amongst other things.
• Show you’re special – highlight your point of difference from your competitors and what makes you stand out from the competition. Demonstrate how you’ve protected your Intellectual Property and if you can show that your business is scalable (for bigger markets), or well-suited to changing or new markets, so much the better.
• Sell your team – show that they’re experienced, skilled, and ready for the journey. Be upfront about what gaps that need filling - the investor may be able to help you fill them.
• Research potential investors – don’t grab at the first person to offer money. Make sure you’ve done your due diligence on all potential investors so you can decide which will work best with you and your business.
• Put yourself in the shoes of potential investors – think about what questions they will want answered and what they will be looking for, for example:
  • The product/market fit – what problem is this solving, how big is the market and how much will people be willing to pay for it?
  • You – they will want to be sure that you have the passion and determination to succeed, and that you have the right team behind you
  • Validation and risk mitigation –e.g. how many customers do you have, what are your sales?
  • Competitive environment – who are your competitors, how will you protect your Intellectual property / business model?

(For more tips on what investors typically look for, check out the Icehouse Capital Raising Guide).

If you don’t succeed in convincing investors to back you, it doesn’t necessarily mean your business idea is a bad one. There could be many reasons why people choose not to invest, from timing to other opportunities or simply differing perceptions of risk or market potential.

If you get a rejection, ask why – it could give you valuable insights that can help you improve your product, or tailor your ‘pitch’ to better appeal to potential investors. And for investors who are on the fence, keeping them in touch with periodic updates on your progress may help get them over the line.