11 Practical Ways To Raise Funds For Your Business

Having a new business idea is great but finding a suitable funding source is equally as important, and often challenging. Without the backing of stable investments, a business will not be able to achieve its full potential regardless of how appealing the idea is. This article sets out the funding options that entrepreneurs can consider when starting a business.

Bootstrapping

Bootstrapping is one of the most common ways to fund a startup as you will be required to run your business using your own funds. This could come from personal savings, credit cards or selling assets such as your car or house to generate cash for the purpose of financing your business. This may seem like an easy way to obtain funds but keep in mind, if your business fails to succeed, you may end up with a substantial amount of debt in hand.  

Friends and Family

Obtaining funds from friends and family is a classic simple option to kickstart a business. Your friends and family are usually supportive and would be willing to help fund your business unlike investors or banks who requires convincing and lots of consideration. However, the downside of this is that there is a risk of relationships being ruined, therefore you should always take steps to prevent this from happening. For example, setting up clear repayment terms and signing an agreement with them.

Incubators and Accelerators

This became popular in recent years amongst younger entrepreneurs who are seeking funds to start their businesses. These platforms are part communal workspace and part mentorship development centres, where young businesses can get a great start while partnering with some amazing people. Incubators are like a parent to a child, who nurture the business, provide shelter tools, training and network to a business, while accelerators help to run or take a giant leap. However, they are often focused on tech- heavy businesses, so you might struggle to find one that works for your company, if your business is not in the technology space.

Winning Contests

There has been an increase in the number of contests recently who can help entrepreneurs in fundraising. In order to win these contests, you have to ensure that you have a comprehensive and unique business plan to convince people that your idea is worth investing in. This is very interesting as not only you would be able to gain funds, you will also get some media coverage if you win these contests. Popular contests in Malaysia includes “Young Entrepreneur X Factor”, “MaGIC University Startup Challenge”, “Dream Factory Startup Contests” etc.

Get an angel investor on board

There has been a rise in online angel investment networks, as well as local investor groups you can pitch in to in person. Angel investors are usually high net worth individuals who provide industry knowledge, financial backing, as well as industry or business experience to early stage start-ups or entrepreneurs, while expecting to share the company’s financial rewards in return. Some of the popular angel investor platforms in Malaysia are Angel Investment Network, Capital, BizAngel and Cradle Fund. Usually, angel investors do not take more than 10-20% equity when investing in a start- up, allowing enough incentives to the business founders. The downside of this method is that they generally offer less financial backing compared to banks and venture capital funds.

Venture Capitalist

This is somewhat similar to angel investors where they provide funds based on their trust in your ability to create a successful, profitable venture. Often times, venture capitalists support start-up ventures (for an equity stake) or small companies that wish to expand but do not have access to equities markets, as they would be able to earn a massive return if these companies succeed. Of course, in order to convince them to invest in your idea, you will need a business model that stands out from the rest in the market. Popular venture capitalist companies in Malaysia and South East Asia includes NEXEA, RHL Ventures, 500 Start- ups etc. On the other hand, venture capital funds have a short shelf life in nature as they generally seek to recover their investments, obtain profit and move on to the next potential start- up.

Government Grants and Loans

While this method doesn’t cut a massive check, there are dozens of grants offered by federal and state governments that you can consider. In Malaysia, the government has implemented various financial schemes and incentives to help local startups and enterpreneurs to kick start their business. The main drawback of this method however is the fierce competition, as well as the box- ticking requirements to qualify for such grants.

Personal Loans

These loans are generally easier to get than a business loan and is suitable for businesses that don’t need a large amount of capital. The advantages of this option are you can retain full equity, can feasibly obtain a large figure, and that you can build your credit. The downside of this method is that personal loans generally have lower financing limits and higher interest rates. You also risk going into bankruptcy if you are unable to pay everything back, including interest. 

 

Small Business Loans

While most banks do offer loans to small businesses, they tend to be more careful when doing so, ensuring that you have a good credit score. In Malaysia, banks usually grant such loans based on your bank statements, credit history, and other relevant financial information. Although these loans have higher financing limits and lower interest rates compared to personal loans, it can be difficult for business to qualify.

 

Crowdfunding

Crowdfunding is a rather new method for businesses to raise funds from individuals that support the projects or companies through small contributions. There are two types of crowdfunding: Reward- Based Crowdfunding and Equity- Based Crowdfunding. Reward- Based Crowdfunding is more similar to consumption rather than investing as the funders may not necessarily obtain back the money invested, instead they will receive certain rewards. Equity Crowdfunding is where people invest in a business in exchange for shares in that company. The investors will be partial owners of the company and might be entitled to dividends if the company is making a profit. The downside of this is that, with the rise of popularity in crowdfunding, it has become really competitive, so you have to generate a lot of buzz in order to stand out from the rest.

Peer to Peer (P2P) Lending

This is considered a debt- based crowdfunding, when investors pool money to lend to a business without an official financial institution participating as an intermediary in the deal. In Malaysia, P2P lending is generally done through online platforms such as CapBay, B2B FinPal, Capshpere etc. that match lenders with the potential borrowers. This is considered as an alternative source of financing if you don’t qualify for a bank loan. However, keep in mind that P2P platforms tend to charge higher interest rates than banks as investors expect higher returns in exchange for taking on more risk.

 

In a nutshell, all the above funding options require a good amount of consideration. What may be suitable for one business may not be suitable for another. Perhaps, a business can look at a combination of funding options as one may not be sufficiently enough. At the end of the day, you should always opt for a method that you feel most comfortable and confident with, as you know best about the directions and goals your business is trying to achieve.

*****

About the author:

This article was written by Edwin Lee Yong Cieh, Partner and Lee Jing, Intern – a law firm in Kuala Lumpur, Malaysia.

The view expressed in this article is intended to provide a general guide to the subject matter and does not constitute professional legal advice. You are advised to seek proper legal advice for your specific situation.