Once you’ve defined your capital strategy, the next step is selecting the right funding source. From institutional lenders to private placements, today’s options are diverse and choosing wisely can make the difference between sustainable growth and unnecessary risk. This guide breaks down key funding methods and critical factors to consider before raising capital.
Strategic lending sources for expanding businesses
From startup through the growth stage of any enterprise, raising money is often necessary. The source of the funding may change from friends and family to savvy angel investors and institutional investors requiring a sophisticated proposal covering factors such as management experience, financial information and a plan for profitability.
Understanding where to find capital investment for your business is the first step in procuring it. Think of your business as an investment opportunity; where it's important to know the different types of investors, which can help you make a more informed decision about the best path forward for your business.
How can I obtain capital for my business?
Understanding capital options is critical for strategic planning for a business. The two primary methods, debt and equity, remain foundational. Debt financing offers predictability and structured repayment, while equity financing can provide flexibility and long-term partnership opportunities. Aligning the method and type of capital raising with liquidity goals, risk tolerance, and expansion plans in mind can help support both immediate needs and future objectives.
Institutional and private lenders
Institutional and private lenders consist of public, private and governmental investors that focus on small business generation and expansion, including the Small Business Administration (SBA), private and public group lenders, banks, and credit unions. Small business lenders provide capital to a business in return for regular payments. Often times, these lenders require collateral or assets (e.g. a bond or real estate) to secure financing for its lifetime.
Bank loan amounts for small businesses typically range from $10,000 to $1 million with terms and conditions suitable for business owners growing and reinvesting much of their profit back into their business. If a business is looking for a loan that does not require collateral, the SBA has options that might be helpful.
Angel investors
Unlike small business lenders, an angel investor is typically a high-net worth individual who can offer capital for a portion of the profits or equity of a business. Successful angel investors are typically looking for early-stage companies that have the potential to become profitable. Investments can sometimes exceed hundreds of thousands of dollars and don’t typically involve a long-term relationship. Depending on the angel investor, business owners may also receive mentoring.
Venture capital
Another potential investor that will take a greater interest in building a relationship with a business’s leaders are venture capitalists. Venture capital typically involves a collection of entrepreneurs, bankers and product developers. Their goal is to find business owners and companies that might go public. Venture capital funds manage portfolios with evaluations in the hundreds of millions, but their equity stake in a company tends to be relatively small. A company could receive multiple rounds of equity investment from venture capitalists lasting years.
Institutional investors
Public companies often times sell shares to raise capital from institutional investors. These types of equity investors include mutual funds, public and private pension funds, hedge funds, banks and insurance companies. Institutional investors pool large sums of money for investment purposes and look for established businesses that can provide a greater assurance of return on their investment. Typically, enterprises raise capital in the stock market; however, institutional investors such as banks can also support these companies through lines of credit, corporate bonds, and business loans.
Selecting the best method for your business
When it comes to funding growth, businesses typically rely on two primary forms of capital: debt and equity. Each approach offers distinct advantages and trade-offs that can significantly impact your company’s financial structure and long-term strategy. Debt financing provides predictable repayment schedules and allows owners to retain full control, while equity financing brings in partners who share both the risks and rewards of the business. Understanding these differences is essential for aligning your capital strategy with your liquidity needs, risk tolerance, and growth objectives. Below are a few examples of the types of funding that may be available.
Corporate bonds are a type of debt capital. In simple terms, corporate bonds involve a few key items:
- The company seeking funds issues bonds.
- Buyers pay the cost of the bond to the business, providing funding for current or future activity.
- The business makes interest payments to the bondholders, either at a fixed or variable interest rate (but generally on a set repayment schedule).
- After the last scheduled interest payment, at the bond’s maturity date, the company pays back the initial investment.
Corporate bonds typically avoid sharing equity in the business with a single investor or group of investors. While the interest rate for the raised capital can vary (creating some uncertainty about the total amount owed to bondholders), it’s possible to estimate these costs and create a business plan that accounts for them.
Bank loans, a type of debt capital, are frequently used by businesses for a variety of financial needs including raising capital. A business applies for a loan and, if approved, receives a lump sum payment from a financial institution. In return, the company often pays both principal and interest over an agreed-upon time period until the debt is paid in full. Bank loans generally offer predictability and clear expectations. Companies with a strong customer base and a history of revenues may find them easier to procure than a startup company or companies with less robust revenue.
Syndicated debt, also referred to as a syndicated loan, is a specific type of bank loan. The unique quality that distinguishes syndicated debt from a standard conventional bank loan is the participation of a group of lenders that provide the financing. Syndicated debt is a practical approach to raising capital. A syndicated loan distributes the risk and commitment of funds presented by the loan across several lending providers. While a single lending institution may not have the risk tolerance to fund a loan or may not be in a position to dedicate a substantial portion of available funds to it, a group of financial institutions can better mitigate these risks.
Private placement involves the sale of stock or corporate bonds to specific outside investors instead of through a public market available to all. A fundraising approach using stocks is a form of equity capital. This strategy allows a business to raise funding from a carefully selected, pre-qualified group.
Identifying and preparing for fundraising can sometimes feel like an overwhelming process for a business owner. The following are some fundamental critical factors for businesses to avoid when seeking a capital investment.
Key pitfalls to avoid when raising capital
Avoid neglecting the following critical factors when raising capital:
- Existing debt. The existence of personal or business debts does not automatically prevent a business from procuring funding, but it can adversely affect the loan terms or shrink the investor pool to only those with a higher risk tolerance.
- Liquidity. A potential investor or lender will often examine a business’s cash flow and available sources of cash to help determine how much to invest or loan a business.
- Collateral. Ensure the assets you plan to pledge such as shares, real estate, or equipment, align with the requirements of your chosen lending option. Matching collateral to the financing method can help streamline the process and avoid delays.
- Business plan. A crucial part of raising capital is the preparation of a sound business plan. Investors want to know how a business intends to make money from their investment and approximately when a business might reach its business goal.
- Financial statements. Incomplete or outdated financial statements can create delays. Ensure your balance sheet, income statement, and cash flow statement are accurate and current before seeking funding.
In addition to the items above, a business should look for a partner to support its business goals for raising capital. External funding and partner financing support continued success for companies aiming to grow and diversify. Determining the best method to secure this capital is vital for the best chance at success. Comerica Bank can empower your business to raise the capital it needs to realize key objectives. Learn more about working with our experienced and knowledgeable business financing specialists.
