How to gain capital to start a business

If you have a good business plan, including a strong management team, market opportunities, and efficient operating procedures, you have the foundations of success. However, to realize that success, you’ll need to secure capital to get started. Exploring different approaches to raising funds for your small business is critical to turning your ideas into reality.

Fortunately, you have many options when it comes to fundraising for a new business. The best choice—or combination of choices—for your new company will depend on factors such as your risk tolerance and whether you want to share equity.¹ Learning how to raise capital for your small business ensures you make choices that align with your goals and resources.

This article will explore different methods of raising funds for a small business so you can make an informed decision that suits your needs.

Before you start exploring ways to raise capital for a small business, you should understand how much money you need. You might wonder, how do you raise capital for small business ventures effectively? The answer begins with understanding your unique funding requirements. Learning how to raise capital for small businesses starts with creating a realistic cost projection. This will depend on the stage your startup is in, your competition, your operating model, and your growth plans. This information will give you a clear idea of your funding needs so you can set effective goals.²

A startup budget will give you an overview of how much money you need to start your business as well as keep it operating over time. Putting together a detailed budget before you start your business can be challenging because you don’t have existing data to guide you. However, while you will have to speculate some, you can still develop a realistic budget based on projections.³

Start by brainstorming all potential expenses you might incur during the first year, including costs related to setting up your business, fixed costs such as rent and equipment, and variable costs such as advertising and travel expenses.³

Next, estimate your anticipated revenue, including money you’ll make from early sales and other sources of funding you may have secured. The difference between the amount of funds you have to cover operating costs and future development and the amount you need is your funding gap. This is the amount of capital you’ll need to raise through your funding efforts.⁴

Self-funding with your existing assets—also known as bootstrapping—can be a good option for smaller businesses that don’t have a huge funding gap. This model can work well if your business model is one that can scale gradually as you increase sales.⁵

When you’re raising capital for a small business and want to bootstrap, you can use funding sources such as your personal savings, income from another job, or the sale of your personal assets. If you choose bootstrapping, you’ll have greater control over your business since you won’t have to share equity. You’ll also be able to avoid taking on debt.⁵

The disadvantage of bootstrapping is that you risk losing your personal assets if the business fails. Unless you have substantial assets, your growth options will also be limited because you won’t be able to invest in many expensive market-expanding opportunities.⁵

With popular crowdfunding platforms, you can raise small amounts of money from individual investors who believe in your business idea. Since the investment amounts are generally small, you may find it easier to attract more investors.⁶

Crowdfunding platforms vary, but most typically offer reward-based and equity options. With reward-based crowdfunding platforms, investors receive a reward, such as a product, for their contribution. This can be a great way to provide proof-of-concept and generate early sales, particularly if you’re providing a new product that will fill a gap in the market. Equity crowdfunding gives investors part ownership of your company in exchange for their contributions.⁶

If you raise capital for your business through investor funding, you give up a percentage of ownership to investors. Investor funding can take various forms, including angel investors, venture capital firms, and private equity.

Angel investors are typically high-net-worth individuals who are comfortable with risk. They often invest in areas where they have established expertise and connections. They can make their own investment decisions, so the process can be quick and easy compared to going with a firm.⁷

Unlike angel investors, venture capital firms invest on behalf of others and often represent specialized firms, wealthy investors, or investment banks. Venture capital firms primarily invest in new startups, particularly those that they believe have the potential to yield higher returns.⁸

Private equity firms typically invest in more mature companies on behalf of large institutional investors, such as pension funds and groups of accredited investors. They often seek to acquire 100% ownership of the companies they invest in, to streamline operations and increase profits.⁸

For early-stage startups looking to raise funds, angel investors offer a unique and valuable source of capital. These high-net-worth individuals are often willing to take on higher risks than traditional lenders, as they invest in businesses they believe in, particularly those with strong growth potential and innovative ideas.⁹

Unlike venture capital funding, which often involves multiple investors and large stakes in established businesses, angel investors tend to make decisions more quickly and can offer personalized support to the entrepreneurs they invest in. This can be a game-changer for entrepreneurs who need both financial backing and expertise to scale.

Angel investors typically invest in exchange for equity financing, providing you with capital in return for a share of ownership in your business. This approach is especially beneficial for startups that are not yet in a position to qualify for business loans or small business loans, which often require established financial histories and collateral. The flexibility of angel investors can give your business the runway it needs to grow without taking on significant debt.

One of the primary benefits of working with angel investors is that they often come with expertise and networks that can help accelerate your business's growth. Many angel investors have experience in small businesses or have worked with private equity firms, and they can provide strategic advice, introductions to potential partners, or even help with operational challenges. Their involvement can go beyond just capital—offering invaluable mentorship that will help your startup navigate challenges and optimize its growth potential.⁹

Angel investors differ significantly from other forms of financing such as private equity or venture capital. While private equity firms and venture capitalists typically focus on established companies with a clear path to profitability, angel investors are more likely to take a chance on unproven startups, understanding the inherent risks involved. This willingness to take on risk can be particularly helpful in the early stages of your business when traditional financing options, such as small business loans or debt financing, may not be accessible.

However, one key consideration when raising funds from angel investors is the equity financing structure. Since you are giving up part of the ownership of your company, it’s essential to weigh the long-term implications carefully. The terms you agree on with your angel investors will affect your profit and loss statement, so it’s critical to have a clear agreement in place to avoid misunderstandings down the road.

To attract angel investors, you’ll need to present a solid business plan, including realistic projections for startup costs, expected revenue, and the milestones you plan to achieve in the short and long term. Be sure to provide transparent financial statements to give investors confidence in your business's financial health. Having a profit and loss statement prepared, along with a clear path for how their investment will be used, can make the difference when seeking angel investment.

If you want to retain complete control over your business, government grants and loans can help. Grants don’t have to be repaid, so they’re often an attractive choice for new businesses. However, government grants—especially ones from the federal government—are generally difficult to obtain. Competition for them is high, and they require strict, complex application processes.¹⁰

Government loans—particularly Small Business Administration (SBA) loans—are widely available and may offer better terms than traditional bank loans. These loans are geared toward helping small business owners with longer repayment terms, lower down payments, and lower interest rates.¹⁰

Other nontraditional financing options include invoice factoring and revenue-based financing. Invoice factoring involves selling your outstanding invoices to a third-party company. The advantage is that you’ll have immediate access to money versus collecting the invoices on your own, which can be a slower process. The disadvantage is that you’ll sell them for less than their face value.¹¹

Revenue-based financing commits a portion of your future revenue to a lender. You’ll receive an upfront loan but you can retain complete control over your company, including outstanding invoices.¹¹

KU’s online MBA program will prepare you to lead companies of all sizes in today’s competitive global marketplace. Our top-ranked program gives you the hard and soft skills you need to succeed as a business leader, whether you’re running your own startup or guiding established Fortune 500 companies.¹²

You’ll also become part of the extensive Jayhawk network, where you can make connections that will last throughout your career. Contact one of our admissions outreach advisors today to apply.