Need To Raise Money for Your Start-up or Growing Business? You Have Options Beyond Bank Loans

It takes a certain amount of determination to launch a successful start-up or scale up a small business. That quality serves entrepreneurs well during fundraising. Raising money tends to be one of the most challenging parts of taking a growing business to the next level, and entrepreneurs may have to knock on a lot of proverbial doors to collect all the capital they need. When a business owner can’t get a bank loan, or a bank loan doesn’t cover the total amount needed, there are other ways to raise money for a start-up or growing business

Raising Money as a Start-up

Start-up owners who need to raise money tend to have somewhat restricted options. The fact is that the majority of start-ups fail, and outside investors are generally not going to be willing to pump money into an untested company unless they have a personal interest in the business or its owners.

So how do start-up owners raise money? Often, it’s by tapping into their own resources, including their social networks. An entrepreneur might approach family and friends about investing in their business. There are a lot of different ways to structure these arrangements. A friend or relative might extend a straightforward loan, with or without interest attached. Or they may invest in a loved one’s business in exchange for partial ownership, which may or may involve giving these investors some control over how the business is run. 

Family and friends funding can be highly advantageous for a start-up owner, but these arrangements can be complicated by emotional ties.  If the business fails and investors lose their money, how will those relationships be affected? Or, if investors are granted partial ownership, will there be tension when the owner makes decisions their investors disagree with? Clearly structuring these arrangements is essential so all parties understand exactly what risks and rewards they’re agreeing to before any money is exchanged. 

If friends and family funding isn’t viable, start-up owners often rely on bootstrapping—growing a business with little or no investment from outside sources. In other words, funding your start-up with your own financial resources. That might mean tapping into your savings, pulling money from retirement accounts, selling property to liquidate cash or incurring personal debt with credit cards. These decisions may put your own financial future at risk, so bootstrapping isn’t something to enter lightly. Talk through the potential implications with your financial and business advisors before involving your own money. 

Raising Money for a Growing Business

You’ve established your company and generated enough business that it’s time to scale up. Now you need to pay for expenses like hiring more staff, buying new equipment and maybe even moving or expanding your premises. Beyond a bank loan, where can you look for necessary capital?

Established business owners tend to have more options for raising money because they can point to a track record of success. Sometimes another round of friends and family funding will bring in enough money for the next phase of growth. Private placement is another method business owners can use to raise money for expansion. It’s a way of offering company equity to a limited number of investors, as opposed to selling company stock in an IPO. Another option is asset-based lending, which allows a business to use its assets (equipment, inventory, etc.) as collateral to secure a loan from a lender. 

Finding an angel investor who’s interested in your business’s niche or mission might also allow you to secure a significant investment. For example, an angel investor who’s passionate about supporting women in tech might be willing to invest in the expansion of a female-led software firm. But not every business will be able to attract the interest of angel investors, or the interest of venture capital firms. Venture capital funding gets a lot of media attention but is rarely viable for small businesses. These firms get far more proposals than they’re able to fund.  While some start-ups and expanding companies do secure VC funding, it’s a relatively rare way for a business to raise necessary cash. 

What to Know Before Proceeding

As you think about raising capital for your growing business, perhaps the most important wisdom to keep in mind is this: No two businesses have exactly the same fundraising options. Many factors will affect what kinds of financing you’re able to secure, including your personal resources, the resources of your friends and family, current market volatility, your industry, the strength of your business plan and your vision for the business’s future. What kind of deal you’re able to put together, and how your business attorneys and advisors help you structure that deal, will be unique to your business and your circumstances. 

The business attorneys at Sassoon Cymrot, LLC work with clients at all stages of development to create the plans that support their long-term business success. Whether you’re trying to launch your first start-up or expand your growing business, we’re here to help you make the plan a reality. If you have questions about raising money as a start-up or growing business, contact us today!

Scott Wittlin is a business and tax attorney with significant experience in advising businesses and the business owner. Scott works with business owners in addressing the complicated tax decisions they face in both their succession and estate planning. He works with his clients to maximize their tax benefits in all facets of their business and personal lives. He also assists families with probate and estate administration.
Lauren A. Puglia has been practicing business law for more than three decades. Her areas of expertise include mergers and acquisitions, representation of start-up companies, issuers, franchisors and franchisees, and venture capital funds. Ms. Puglia also acts as “outside general counsel” for several small to mid-size businesses, assisting and advising them on all aspects of their business.

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Sassoon Cymrot Law and Grossman & Associates have joined together into one firm under the Sassoon Cymrot Law name effective May 1, 2021.