Raising capital for your business

If you need a cash injection into your business, you may find internal sources of cash — or need to seek extra capital externally. Before you look outside your business, identify other ways to raise the funds you need. Here are three common options

Step 1: Consider selling any existing assets

These are any items that can be quickly sold and converted to cash.  If you don’t need to repurchase these items to continue to operate, you could use the money to pay for other more immediate costs.

• If you’re holding excess stock and raw materials to take advantage of bulk discounts or efficiencies, look at reviewing your processes to order ‘just-in-time’ and lower the volume you hold.
• Streamline and sell any fixed assets you no longer need. These could include excess technology, office equipment and furniture, obsolete or underused machinery or vehicles.
• If you own property, land, equipment, or vehicles that are still needed, you could consider selling the asset to free up capital and then leasing it back. It usually costs more in the long run to lease an asset than own it, but you’ll get an immediate injection of cash.

When you find yourself facing difficult circumstances, it may be necessary to scale back to a leaner operation to preserve the business for the future. This requires balancing the need for sufficient cash to survive without permanently crippling the business.

Take a close look at any parts of your business that aren’t essential, and could be sold without disrupting your core operations. For example, if you have multiple locations, branches, or offices, consider selling them or liquidating their assets. If you’ve expanded into non-core products or markets, it might be a good time to refocus on what you do best.

Keep in mind that liquidation values are often lower than market value, so weigh all options carefully before selling assets to keep things afloat. It’s important to seek legal, financial, and business advice when making decisions that could affect your long-term prospects.

Step 2: Equity capital

With this method, you raise cash in exchange for selling part of your business. Investors pay money into the business to promote growth in exchange for a percentage of ownership. The main providers are:

Angel investors

These are usually other business owners who think your business is promising, and are willing to buy into it. Typically, they invest in businesses they’re familiar with — wanting either a return on their investment, some equity, or both. They are usually keen to get involved at an early stage, bringing their own experience to the table.

Venture capitalists

Venture capitalists are usually investment companies or fund managers who provide cash in return for part ownership. They’re typically looking to invest larger sums of money — potentially even above and beyond what you need — and their requirements may be tougher than those of angel investors.

Preparing for equity capital

Regardless of where you get the capital from, the more prepared you are the better. Here’s how to build a strong business case:

• Speak to your lawyer and accountant about finding investors. They’ll have good contacts and advice.
• Get your processes and systems running smoothly, and monitor key performance indicators. Look for ways to work smarter, try to reduce overhead, and make sure all marketing is measured so you can prove what works.
• Review your business plan and make sure it’s well presented.  Define your goals, how you’re going to achieve them, why you need capital, and how much you need.
• Showcase your competitive advantage and points of differentiation.
• Demonstrate how you’ve protected your intellectual property and show that your business is scalable.
• Make sure you’ve done your due diligence on all potential investors, so you can decide which one(s) will work best with you and your business.
• Consider the risk of sharing ownership if you decide on the equity option.
• Being well prepared is essential, as it shows you can make informed decisions

Step 3: Debt capital

This is the most common form of raising capital. It’s money you borrow, usually from your bank, credit union, or friends and colleagues. It could be short-term funding like a line of credit for extra stock, or longer-term loans for buying new equipment or a building. Most of us are familiar with borrowing money. The most popular sources are:

• Friends and family. Often a first option as they are easy to approach.
• The credit union or bank, often by using spare equity in your house. Interest rates with a property as security are almost always lower than unsecured finance alone. You might also consider asset finance — where you borrow cash over the value of an asset, work in progress, or stock.

A business is typically ready to get a loan when it meets the following criteria:

1. Stable cashflow: The business consistently generates enough revenue to cover operating expenses and repay debt.
2. Good credit history: Both the business and its owners have a solid credit score, with a history of managing debt responsibly.
3. Clear business plan: A business plan with financial projections that demonstrate the company’s ability to repay the loan.
4. Collateral: The business may need to offer assets (like property or equipment) as collateral to secure the loan.
5. Time in business: Most financial institutions prefer businesses that have been operating for at least 2-3 years, as this indicates stability and experience.
6. Low debt levels: The business should have manageable existing debt and not be overly leveraged.
7. Legal and financial documentation: The business should be properly registered, and have up-to-date tax returns, financial statements, and other required documentation.

Having these factors in place helps demonstrate to a credit union or bank that the business is financially stable and capable of repaying the loan. Connect with a Coast Capital Business Advisor to learn more about raising capital.

Other options for raising capital

Although the above options are the most common, they’re not the only ones available. You could also:

• Explore if you qualify for any federal or provincial government funding. Typically, this comes in the form of grants. The Business Benefits Finder on the Government of Canada website is a great place to start.
• Check out corporate investors, such as a customer or supplier. Large companies sometimes invest in smaller businesses if they have a stake in seeing it grow or expand.
• Crowdfunding is another option that is growing in popularity. It’s usually facilitated through online platforms such as GoFundMe and Kickstarter. Post a profile of your business and detail that you’re seeking capital, and then the online investor network will work to raise the capital required.

You could also consider a hybrid approach where you obtain funding from a mix of the above three options.

Next steps

• Create a cashflow forecast to determine how much capital you need.
• Find ways to generate this cash without borrowing or selling part of your business.
• Seek expert financial help when raising capital. Speak to a Coast Capital Business Advisor about what will work best for you. However you decide to raise capital, make sure that the option you choose is the right fit for your business

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This content is for general information purposes only. It is not to be relied upon as financial, tax, or investment advice or guarantees about the future, nor should it be considered a recommendation to buy or sell. You should consult your own professional advisor for specific financial, investment, and/or tax advice tailored to your needs to ensure that individual circumstances are considered properly and action is taken based on the latest available information.