How to raise capital for your start-up

Starting a business is a goal that many aspire to achieve. However, finding the capital to start or grow a business is a challenge that hinders this dream for many. If you don’t have enough money saved to fund the business all by yourself, you will probably have to convince hard-nosed bankers that your business idea is viable and worthy of receiving a loan.

That, understandably, is a tough task. Not everyone is able to access business loans. This can be due to poor credit history, lack of collateral or unsteady source of income among a myriad of reasons.

But all hope is not lost. Other than using your savings or getting a bank loan, there are several unconventional ways you can get funding for your start-up.

Here are some of the top unconventional ways to raise capital for your business:

1. Business Incubators

The early stages of a business are especially challenging. You not only have to find funds for the business, but you also have to develop your product, establish a business location, figure out your customers’ unique needs, work on establishing your brand, and fight off competition. No wonder many potentially viable businesses die in their first year. Statistics show that 90 per cent of start-ups fail.

Business incubators are initiatives which help nurture young businesses through this tough period. Business incubators provide a set of resources geared to help start-ups to set up and roll out. The resources provided by most business incubators include office space, computers, WiFi access, support staff, networking opportunities, and guidance from qualified mentors on how to grow the business.

Business incubators also give financial aid to young businesses. However, the money isn’t for free. Most incubators might get a stake in the company. They might also require the businesses to pay a monthly fee which covers rent for office space, paying mentors, salaries of support staff and other overhead costs.

In Kenya, some of the top business incubators include iHub, Nailab, Afrilab, Chandaria Business Innovation and Incubation Centre, Biz Africa, Business Incubation Association of Kenya among others. Search online or contact the business incubators to find out if your business qualifies for funding.

2. Vendor Financing

You have an idea to manufacture or supply a certain product to the market. You have done your homework and established that a need for the product exists. However, you don’t have enough capital to actualise your dream. This is where vendor financing comes in!

As the name suggests, vendor financing is where you approach vendors to give you loans to enable you to continue your business. Vendors might fund you if you have already established a reliable, trustworthy relationship with them, especially if the product/service is in high demand. Vendor financing is especially common in high-growth sectors such as tech or bio-sciences.

Vendor loans usually have higher interest rates than bank loans but they might help your start-up business weather financial challenges. Vendors might also opt for a stake in the company in exchange for financing.

Vendor financing might also be in form of being allowed to take supplies on credit. Usually, the credit extended to the start-up requires payment at much later date than their usual credit period, although the vendors might charge an interest for this. This might work when a start-up has only one or two vendors they get their supplies from. Thanks to fear that the start-up might still fail and be unable to repay the loan, this type of funding is quite rare.

3. Business Plan Competitions

All year round, every year, there are various business plan competitions which give handsome financial awards to winners.

To enter such competitions, you have to actually sit down and pen your business plan – something that will force you to take a closer look at the viability of your idea. Therefore, even if you don’t win, this will be a rewarding exercise. You will also get the opportunity to test the strength of your business idea and get valuable feedback from experienced and unbiased judges.

If you win, you will have no-strings-attached funds for your young business. The average business plan competition offers hundreds of thousands or even millions of shillings. Look up top business plan competitions in Kenya such as Jitihada Business Plan Competition and MbelenaBiz Business Plan Competition among others.

4. Angel Investors

Wealthy individuals often fund start-ups in exchange for an equity stake in the business. They might also give the funding as a loan with higher rate of return (usually 25 per cent or more) than would be given by traditional funding options. In the business world, these benevolent people are known as angel investors.

Angel investors fill the gap between the small-scale financing given by family and friends and venture capitalists. Unlike bank loans, you don’t have to pay bank the amount awed in case your business fails. Additionally, most angel investors offer valuable mentorship and networking opportunities to the entrepreneurs they choose to invest in.

5. Customer Investment

When your business is cash-strapped, it might be a good idea to have customers make their orders and pay for the products in advance. This way, you can use the money to supply them with the goods they need.

This strategy can especially be effective if you give customers an incentive –such as a discounted price if they pay for their orders in advance.

6. Crowdfunding

You have probably heard of crowd-funding websites such as Kickstarter, GoFundMe, Indiegogo , among others. Crowdfunding is one of the newest ways of financing start-ups. According to Investopedia, crowdfunding is the use of small amounts of capital from a large group of individuals to finance a new business venture. Basically, it is having an online “harambee” to finance your business.

Unlike other forms of financing, crowd-funding is no-strings-attached capital for your business. The investors don’t expect you to pay them back or give them equity in your start-up. Additionally, crowd-funding is a great way to test the market for your business. You can tell by the kind of response you get if there is need for the product or service you hope to provide.

Take your time researching various crowd-funding platforms to find one which suits your needs best. In Kenya, the top crowdfunding site is M-Changa, which uses local mobile money systems such as Mpesa, Airtel Money, Orange Money and Equitel. Remember, it is a good idea to offer the people donating a reward for their donation. For instance, you can give out samples of your product.