Many companies require money from external sources in order to expand or operate. There are five main methods that you can use to raise money for a business:
- Invest your own money
- Borrow money from family or friends
- Borrow money from a bank/financial lender
- Issue and sell more shares
- Obtain government funding
Invest your own money
The first option is to invest your own money into your business. If you do not have enough money saved, you can consider raising the money yourself by mortgaging your home or getting a personal bank loan.
Borrow money from family or friends
The second option is to borrow money from your family or friends. If you choose this method, you will have to decide whether your family or friends will be lenders or shareholders. You will owe your family or friends a different legal obligation depending on whether they are lenders or shareholders. If they are lenders, then the business will most likely be responsible for paying them the loan amount plus interest. If they are shareholders, then they will become owners of the business. As an owner, they will not be able to recover the lent money unless the business becomes successful. If the business is successful, your new shareholders will share in the business profits.
Borrow money from a bank/financial lender
The third option is to borrow money from a bank or financial lender. In most instances, a bank will use the business assets as security before it decides to process the loan. Simply put, if the business is unable to pay back the loan, the bank will be able to seize the business assets, sell them, and use the funds to pay back the outstanding business loan. Any money left over from the sale of the business assets must be returned to you. Additionally, the bank will most likely require a personal guarantee from all of the owners of the business. This means that if the business is unable to satisfy the outstanding loan, the bank will then be able to collect the outstanding funds from the business owners as well as their personal assets.
Issue and sell more shares
The fourth option, if your business is a corporation, is to issue and sell more corporate shares. The caveat, however, is that when you sell more shares, your percentage ownership in the corporation will be reduced. Before you decide to issue and sell more shares, you should always consult a lawyer to discuss the legal consequences as well as the best options for your particular circumstances.
Obtain government funding
The fifth option is to obtain government funding. You might be eligible to receive financing from any of the numerous government-sponsored programs designed specifically to help businesses grow. For sound legal advice, it is always recommended that you consult a lawyer.
Financing your new business