How to Raise Money for your Business (23 Best Options)

Starting a business can be an exciting venture, but it also requires significant money. So whether starting from scratch or looking to expand an existing business, raising money is essential to achieving success. Fortunately, there are several ways you can raise money for your business. This blog post will explore some of the most popular methods.

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Money to Get Started

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1. Bootstrapping: Bootstrapping refers to funding your business using your resources, such as your savings or the operating revenue from the company. While this approach may seem risky, it can help you effectively avoid debt and maintain complete control of your business.

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• Related Article: What is Bootstrapping?

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2. Friends and family: The first investors for many businesses are friends and family members. Depending on the business, a friends and family round can be structured as a debt or equity agreement. While this approach may be risky because it could strain your relationship, friends and family members may be more willing to take a risk on your business idea because of their relationship with you and their belief in your abilities. The best thing to do is to set expectations that friends and family should only invest money they are willing to lose and educate them on the timeline for a return.

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• Related Article: How to Raise Money from Friends and Family

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Debt Options

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Most small businesses raise money in the form of debt to start or expand their business. These debt instruments, most commonly loans, can be structured in various ways, depending on the lender and the borrower's needs. Here are the most common debt instruments for businesses:

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3. Term loans: Term loans are the most common type of small business loan. These loans are structured as a lump sum of cash repaid over a set period, typically between one and five years. The monthly payment is typically fixed with interest added to the principal balance. Term loans can be secured or unsecured, requiring collateral such as equipment or real estate. Term loans can be used for any business expense, such as a lease payment or purchasing equipment and supplies.

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4. SBA loans: SBA loans, backed by the U.S. Small Business Administration, are designed to help small businesses obtain funding. These loans typically offer lower interest rates and longer repayment terms than traditional bank loans. The maximum amount for an SBA Loan is $5 million.

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5. Business lines of credit: A line of credit is a type of debt that gives a business access to a pool of funds that can be drawn upon as needed. This type of loan is generally accessible from your business checking account. Lines of credit are typically used for short-term cash flow needs and can be secured or unsecured. Unlike a term loan, where you have to pay the interest on the entire loan regardless of whether you use it, the borrower only pays interest on the amount of funds drawn down.

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6. Equipment loans: Equipment financing is a loan to purchase equipment or machinery. Typically, the equipment itself secures the loan, and the term is based on the useful life of the equipment. This type of loan benefits businesses that need to purchase expensive equipment but do not have the cash to do so.

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7. Invoice financing: Invoice financing, also known as accounts receivable financing, is a type of debt that allows businesses to access funds based on their outstanding invoices. The lender will advance a portion of the invoice amount and collect payment from the customer. The borrower then repays the loan, plus interest and fees. This type of loan is beneficial for businesses that need immediate cash flow.

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8. Microloans: Microloans, which are small loans typically ranging from a few hundred dollars to $50,000, are another financing option available to businesses. Nonprofit organizations or community lenders provide these loans, and they can be used for various business purposes, such as purchasing inventory, equipment, or supplies.

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9. Merchant cash advances: Merchant cash advances are a type of debt where a business owner receives a lump sum of cash in exchange for a percentage of future credit and debit card sales. This type of financing is typically more expensive than other options and should be carefully evaluated before considering it as a viable financing solution for your business.

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10. Commercial real estate loans: Commercial real estate loans are designed to help small businesses finance the purchase, construction, or renovation of commercial properties, such as office buildings, warehouses, and retail spaces. These loans are typically secured by the purchased property and have longer repayment terms than other small business loans.

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11. Franchise loans: Franchise loans help entrepreneurs finance the purchase of a franchise business such as Mcdonald's, Chick-fil-A, Jiffy Lube, and Papa John's. These loans are typically structured as term loans and may require collateral or a personal guarantee from the borrower. Banks and other lenders that specialize in financing franchise businesses offer franchise loans.

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12. Revenue-based financing: Revenue-based financing is a type of debt where a business receives a lump sum in exchange for a percentage of its future revenue. Unlike traditional loans, revenue-based financing does not require collateral or personal guarantees from the borrower. The repayment terms of revenue-based financing are based on a percentage of the business's monthly revenue, which continues until the borrowed amount, and any fees are repaid in full. This loan can be attractive to businesses with stable and recurring revenue.

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13. Personal loans: A personal loan can be used to fund a small business. These loans are typically unsecured, meaning no collateral is required, and are based on the borrower's credit and income. Payback is usually between one and five years; you make monthly payments. Personal loans may be a viable financing option for entrepreneurs who cannot qualify for other small business loans.

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Equity Options

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Most startups, or fast-growing companies, raise money in the form of equity to start or expand their business. Equity agreements involve selling a portion of the business in exchange for funding. Here are the primary sources of equity capital in the business ecosystem:

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14. Angel investors: Angel investors are high-net-worth individuals who invest their own money into startups in exchange for equity in the company. These people are often referred to as accredited investors, which means they have a minimum net worth of $1 million, at least $200,000 in individual annual income, or at least $300,000 in joint yearly income.

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• Related Article: Angel Investors: Who are they & how to find them

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15. Venture capitalists: Venture capitalists are investors who provide funding to startups and small businesses in exchange for equity in the company. They typically invest in businesses with high-growth potential and are willing to take on significant risk in exchange for the potential for high returns on their investment. Venture capitalists may provide funding, mentorship, industry connections, and strategic guidance to help the business grow and succeed. Working with a venture capitalist can be a good option for businesses that have already demonstrated significant growth and potential but need additional funding to scale quickly. 

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• Related Article: The Venture Capital Bible

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16. Incubators: Incubators provide resources, mentorship, and networking opportunities to help startups and small businesses grow and succeed. They may offer office space, access to funding, marketing support, and business training programs. While some business incubators help you in exchange for a debt agreement, most incubators help you in exchange for equity and target startups.

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• Related Article: What is a Startup Incubator?

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17. Accelerators: Like incubators, accelerators provide resources, mentorship, and networking opportunities to help startups and small businesses grow and succeed. Most accelerators position themselves later than incubators, meaning incubators will accept people during the company formation period. In contrast, most accelerators want to see some traction (revenue, customers, etc.) before admitting a business into the accelerator. While some business incubators help you in exchange for a debt agreement, most accelerators help you in exchange for equity and target startups.

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• Related Article: Ranking the 10 Best Startup Accelerators of 2023

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Crowdfunding

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Businesses with loyal customers or fans may raise money through crowdfunding to start or expand their business. Here are the different ways you can crowdfund your business:

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18. Donation crowdfunding: Donation crowdfunding is where people donate money to a cause or project without expecting anything in return. Donation crowdfunding can be an effective way to raise money for your business if you have a compelling story, a cause that people are passionate about, or loyal customers or fans. 

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19. Product crowdfunding: Product crowdfunding, or reward crowdfunding, is where you presell your product to fund your business. This is a debt instrument. Product crowdfunding can be an effective way to raise money for your business if you have a compelling product and a good marketing team.

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20. Regulation Crowdfunding: Regulation Crowdfunding (Reg CF), commonly called Equity Crowdfunding, allows businesses to raise funds by selling securities (such as equity or debt) to the public through an online crowdfunding platform. Reg CF was created under the JOBS Act of 2012 and regulated by the Securities and Exchange Commission (SEC).

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• Related Article: Regulation Crowdfunding: What is it, Pros, Cons, and more

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21. Regulation A+: Similar to Regulation Crowdfunding, Regulation A+ (Reg A+) allows businesses to raise money from the general public but with the ability to raise up to $75 million in a 12-month period.

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• Related Article: What is Regulation A+?

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Other Options

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22. Grants: Grants are another option for businesses to raise funds, particularly for businesses focused on social or environmental impact. Grants are free money that foundations, government agencies, or other organizations award for a specific purpose or projects.

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23. Pitch Competitions: Pitch competitions typically involve a group of entrepreneurs pitching their business ideas to a panel of judges or investors in hopes of winning funding or other resources. Pitch competitions are also free money.

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Tips for Successful Fundraising

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No matter which method of fundraising you choose, here are some general tips to help you succeed:

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• Have a solid business plan: Investors want to see that you have a clear vision for your business and a plan to execute it.

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• Build relationships: Networking is critical to finding investors. Attend industry events, join local business groups, and connect with potential investors on LinkedIn.

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• Be prepared to pitch: You never know when you'll have the opportunity to pitch your business. Practice your pitch until it becomes second nature.

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• Be open to feedback: Investors may ask tough questions or give you constructive criticism. Listen carefully and be open to making changes based on their feedback.

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• Be persistent: Fundraising can be a long and challenging process. Don't get discouraged if you get rejected by investors. Keep working on your pitch and building relationships.

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To learn about the best fundraising tips for small businesses, check out this article.

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In conclusion, fundraising for your business can be challenging, but it's essential to starting and growing a successful venture. By considering the different fundraising methods available and following our tips, you'll be well on your way to raising the funds you need to make your business a reality.

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Glossary of Terms

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• Borrower: A borrower is an individual or entity that receives funds from a lender with the expectation of repaying the borrowed amount, along with any interest and fees, within a specified timeframe. In the context of business financing, a borrower may be a business owner or a company seeking funding to start or grow its operations.

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• Collateral: Collateral refers to an asset or property that a borrower pledges to a lender as security for a loan. If the borrower cannot repay the loan, the lender can seize the collateral and sell it to recoup their losses. Collateral can come in many forms, including real estate, equipment, inventory, accounts receivable, and personal assets, such as a car or a home. The type and amount of collateral a lender requires can vary depending on the loan type and the lender's risk assessment of the borrower's ability to repay the loan.

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• Lender: A lender is an individual or entity that provides funds to a borrower with the expectation of receiving repayment of the borrowed amount, along with any interest and fees, within a specified timeframe. In the context of business financing, lenders may be banks, credit unions, alternative lenders, or other financial institutions that offer various financing options to business owners seeking funding to start or grow their operations.

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• Lump sum: In the context of business financing, a lump sum payment may refer to a one-time payment of funds received by a business, typically from an investor or lender. 

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• ‍Startup: A startup is a fast-growing company, typically a technology company, focused on developing new and innovative products. Famous examples of startups are Airbnb, Uber, and DoorDash.