Your startup will need an injection of capital every now and then for its growth and operations. Fortunately, there are several ways you can raise capital for your business depending on the most suitable method. For example, you can obtain debt financing from a bank, friends, or family. Alternatively, you can obtain equity funding from angel investors or venture capitalists. However, it is important to know the legal requirements associated with each capital raising method. This article explains how you can raise capital and the different funding options available in New Zealand.
Raising Capital for Your Startup
When raising capital for your startup, you need to determine how much capital you need. Before seeking external sources, you should consider raising money from internal sources. For example, consider personal savings or selling existing assets.
If you cannot raise capital internally, you can focus on targeting potential investors. Investor capital can fall into the following categories:
- debt financing, where you have to repay the money owed to an investor within a suitable time frame; and
- equity financing, where the investor will receive a stake in your startup in return for their investment.
Debt Financing
Borrowing money is a common way to raise capital for a startup. Usually, you will need to pay interest on the loan. The lender may also require you to provide security for the loan through collateral. Collateral is a personal guarantee (usually a house or car) you make to the lender as security for the loan. If you cannot repay the loan, the investor can claim the collateral as a way to repay the loan. Examples of debt funding include loans from:
- financial institutions such as banks; and
- family and friends.
Bank Loans
A bank loan can take the form of a:
- short-term financing such as a short-term loan or an overdraft; or
- long-term financing, such as a loan.
The type of bank loan you obtain will depend on your business’ needs. For example, taking out a long-term loan may be more suitable if you need equipment or a building. Before approaching a bank for a loan, you should prepare your business’ financial statements and draft a solid business plan. This way, you can reassure the bank that your business will likely meet its debt obligations.
Friends and Family
Another form of debt financing is through your friends and family. Usually, friends and family can be a safe way to raise funds and are more open to supporting your startup than external investors, particularly during the early stages of your business. However, you should always take care when pursuing such arrangements. As you can expect, your personal relationships can be negatively impacted if things go wrong.
Continue reading this article below the formEquity Funding
Additionally, there are many ways to raise capital through equity funding. However, each time you raise capital, you will give up some ownership as you provide investors with shares. Deciding whether to go through with equity funding can be a difficult decision. Potential sources of equity funding include:
- angel investors;
- venture capitalists; and
- equity crowdfunding.
Angel Investors
Angel investors are people who think your business is promising enough to invest in. In this sense, angel investors typically look to invest at an early stage of your startup and can bring knowledge, experience, and networking opportunities to the table. Once they invest, they will expect some shares in your business in return.
Before you approach an angel investor, you should:
- know the amount of capital you need and how you will use it;
- have a sound market strategy;
- develop a good business plan; and
- prepare a pitch as to why you deserve the funding.
You should note that angel investors can provide more than just funding. They can also mentor and guide your business to a successful growth path.
Venture Capitalists
Venture capitalists are investment companies or individuals who provide capital in return for an equity stake in your company. They can invest more significant amounts of money than an angel investor and tend to have more stringent requirements before investing.
However, you should note that unlike angel investors, venture capitalists often invest in bigger businesses. Consequently, you will need to convince them to invest with:
- a solid pitch;
- proof of solid revenue generation; and
- a substantial customer base.
Equity Crowdfunding
Another form of capital raising is equity crowdfunding. To obtain crowdfunding, you will generally post your product or service on a crowdfunding platform for the general public to see. If the public like the offering, they might invest in your startup. This way, equity crowdfunding can potentially increase the number of shareholders in your startup.
However, some strict legal requirements regulate crowdfunding. To ensure you comply with these legal requirements, you should speak with an experienced lawyer.
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Key Takeaways
You can raise capital for your startup either through debt or equity funding. When trying to raise capital from any source, it is good practice to prepare:
- a business plan;
- a sound pitch; and
- financial statements.
These documents can help an investor decide whether or not to invest in your startup. If you need help complying with the legal requirements when raising capital for your startup, our experienced startup lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers who can answer your questions and draft and review your documents for a low monthly fee. Call us today at 0800 005 570 or visit our membership page.
Frequently Asked Questions
Debt financing is when you raise funds that you will need to repay. These funds will typically come from financial institutions such as a bank or your family and friends.
Angel investors offer sums of money in return for some shares in your company. Angel investors can be beneficial as they invest in the early stages of your business and can provide mentorship and opportunities to network with industry experts.
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