Need to Grow Your Business? 4 Ways to Get Additional Capital
The pros and cons of four common types of capital for businesses
PHOTO CREDIT: Getty Images
It’s the essential dilemma for any entrepreneur: How to raise more capital and grow the business? There are four sources one can explore: investing your own money, crowdfunding, borrowing, and raising venture capital.
Before deciding which one is right for you, here are the advantages and disadvantages of each.
1. Investing your own money
This method requires entrepreneurs to put in the seed capital, and then reinvest every peso that the business generates back into the company. The advantage of investing your own money is that it doesn’t dilute ownership and it gives one full management control.
“[Investing your own money] allows you to own every nook and cranny of your business,” Eliza Cornejo co-founder and CEO of Myfliptix, an online and offline distribution platform of films and other multimedia content.
“You don’t have financial investors breathing down your neck, which means you have the space to move fast when things are going smooth or move slow and reflect when a lot of obstacles seem to get in the way.” she says.
Here’s the caveat: With this method, growth tends to be slower. Entrepreneurs often have to keep their day job or some other source of income and learn to balance the workload. In addition, owners often take on the entire financial risk and cannot pay themselves a salary for a long time. And while Myfliptix’s Cornejo was advised to focus solely on the business for it to succeed, there were a family and other obligations to think about.
2. Borrowing money
A second option for entrepreneurs would be to borrow money from a reputable financial institution. This will spare them from having to dip substantially into their savings to put into the business. Take note, however, that this option requires careful consideration about which financial partner is right for you.
For instance, BPI’s knowledge of the markets and experience can help strengthen the ideations on possibilities of the entrepreneur for his business – be it a franchise or a small business.
Junie Veloso, Head of Business Banking at the Bank of the Philippine Islands (BPI) says: "Lack of capital oftentimes limits the pace of growth of a business and prevents entrepreneurs from taking advantage of business opportunities as they arise. Bank financing complements the owner's own money to allow the business to grow faster and achieve scale sooner.
More so, apart from providing financing, we at BPI strive to provide 'Trusted Advice' on one’s plans in growing a business. BPI’s knowledge of the markets and understanding of its clients can add value to the decisions of the entrepreneur – be it a franchise or his own business."
For those looking to franchise, Cedoy Roces, BPI Family Savings Bank's Ka-Negosyo Sales Head says: “When starting a franchise business, you need to have a Trusted Partner who will guide you along the way. It's not just the financial aspect, but even in the operations and strategies." She adds, "BPI Family Savings has provided thousands of Ka-Negosyo franchise loans which has allowed countless entrepreneurs to establish and grow their own businesses."
3. Going into crowdfunding
Crowdfunding brings in the capital of anonymous investors to a business in exchange for equity. The advantage of this is that it raises capital and enables the business to grow without sacrificing the savings of the owners. The investment amounts are small enough so that founders are not forced to share operational control. Nor does crowdfunding always entail giving up equity.
The more popular type of crowdfunding in the Philippines is rewards-based, and is a common source of funding for small businesses and non-profit organizations. This means that people who give their contributions in the business do not get equity in return, instead, they get some type of incentive – discounts, freebies – for participating.
Patch Dulay, founder and CEO of crowdfunding platform The Spark Project, raised money through the platform for his own leather goods company, Obrano.
“Not only has crowdfunding helped me raise initial capital to produce my wallets. It helped me build a community and a following around our brand,” Dulay says.
But crowdfunding was not as easy as he thought it would be. “We really had two months before we launched our campaign. Even during the campaign we had to actively reach out to our backers,” he says, “Having people who advised us on how to manage our funds helped.”
4. Seeking venture capital
Venture capital brings in larger amounts of capital to scale a business, as well as the expertise and contacts of venture capitalists. In addition, for a business to enjoy the support of a well-known venture capital company often paves the path for a larger financial exit such as an IPO down the road.
Bear in mind, however, venture capitalists rarely provide seed funding at the start of a venture. They wait until the company matures to test the commitment of its leaders and the viability of the business model.
For entrepreneurs, trusted advice is crucial to their operations. This is the reason why so many attend talks about financial strategies, devour self-help books, and engage with relationship managers or business experts about managing finances. More importantly, this will help one choose the right way to raise capital for the growing business.