When and How to Raise Money for Your Business

Infusions of capital to your business can allow you to fuel growth, launch new products, and navigate financial challenges. Securing funding, however, requires strategic planning. You must determine the right time to raise money, select the appropriate sources for funding, the type of funding you need to raise (e.g., debt or equity), and prepare your company for investors’ scrutiny. In this blog post, we’ll examine key factors to consider when it’s time to raise capital for your business and how you can optimize your approach to support long-term success.

Debt vs. Equity Financing

First, it’s important to understand the difference between equity financing and debt financing and determine which is the best route to meet your goals.

Equity Financing

At its core, equity financing involves selling a portion of your business in exchange for capital. This might come, for example, from selling shares, angel investors, private equity, or venture capital. In the right circumstances, this approach can provide substantial funding while avoiding the need for repayment. It is not, of course, free money. Selling a portion of your business means that you’ll be sharing future profits and perhaps even giving some decision-making power to your investors. If you’re pursuing equity financing, seek out investors who align with your strategic vision and can offer benefits such as industry expertise and networking advantages.

Debt Financing

Debt financing, on the other hand, is funding your business with borrowed money that you must repay with interest. It allows you to retain full control of your company but requires careful cash flow management to ensure you can meet your repayment obligation. Common sources of debt financing include bank or Small Business Administration loans, private credit, and lines of credit.

Whether debt or equity financing is best for your business depends on its maturity level, financial health, and strategic goals. Also, think about the types of debt or equity tranches you may consider, from short-term, project-based financing to preferred equity. All may come with terms (e.g., spending limits and covenants) that you need to be comfortable with as a business owner.

The Importance of Business Structure

Before you begin raising capital, it’s critical to ensure your business structure aligns with your fundraising goals. If you plan to raise capital by selling shares, bear in mind that only a C corporation structure allows you to sell shares to an unlimited number of investors. S corporations are limited to 100 shareholders, and LLCs cannot issue shares at all.

When to Raise Capital

When it comes to raising money, timing is crucial. Securing funds too early can unnecessarily dilute ownership or amass debt before you have a clear plan to generate returns. Conversely, waiting too long can result in missed opportunities or unnecessary financial pressure. Below, we examine some signs that indicate the right time to start raising capital.

Opportunity for Rapid Growth

If there is strong demand for your company’s products or services, but limited resources prevent you from fully meeting that demand, securing additional capital could help you scale operations more quickly. Robust demand demonstrates clear potential for returns, making it easier to attract investors or secure loans to fund expansion efforts.

New Products or Expansion of Market Presence

If you’ve identified a promising opportunity to introduce a new product or enter a new market, raising capital can help you take advantage of it. It can provide the funding needed for market research, production, and advertising to support a successful expansion.

Enhancing Infrastructure & Capabilities

As your business grows, it will likely need to invest in upgraded technology, new systems, and additional staff. When you need to adopt new software, acquire cutting-edge equipment, expand your facilities, or hire key personnel, additional funding can help you strengthen your company’s foundation and set the stage for long-term success.

Managing Cash Flow & Liquidity

Even profitable businesses can face cash flow challenges, especially those with seasonal fluctuations or long sales cycles. Raising capital can provide stability during tight periods, ensuring smooth operations and supporting growth.

Time-Sensitive Market Opportunities

Some opportunities require immediate action—and the cash to fund it. Perhaps you’re on the verge of securing a major contract that requires additional internal resources, a competitor is ripe for acquisition, or you’re trying to beat the competition to market with your latest innovation. If you delay too long before securing funding, your business could miss out on pivotal opportunities.

Key Times to Raise Money

While there is no single best time to raise money, various developmental stages present distinct needs and opportunities. Take your company’s stage of maturity and financial position into account when determining when and how to raise capital.

Pre-Seed & Seed Funding

Often, startups need an initial infusion of capital before they can begin generating revenue. Early-stage funding, referred to as pre-seed and seed funding, typically comes from personal savings, friends and family, angel investors, or start-up accelerators. Pre-seed funding is for companies with a viable product and identified market. Once a company has developed its product and gained some traction in the market, seed funding can be used for product refinement and early growth. Depending on their product or service, some businesses may qualify for government grants.

Series A Funding

A company must demonstrate to the market that its business model is both repeatable and scalable. Typically, this is done by comparing its customer lifetime value with customer acquisition costs and showing that the company has established unit economics that show a path to profitability. Other key milestones include revenue traction, a clear growth strategy, and a strong team. At this point, the company may seek Series A funding to expand its operations. This round often involves venture capital or private equity investors who evaluate business performance metrics and growth potential. Investors at this stage receive Series A preferred stock in the company.

Series B & Beyond

As companies grow and require additional capital to expand operations, hire key personnel, or enter new geographic markets, they may pursue Series B and later rounds of funding. At these stages, investors look for well established companies with proven revenue models, strong customer acquisition, and strong valuations.

Maturity & Pre-Exit

Established businesses preparing for an acquisition, IPO, or ownership transition may want to raise capital to strengthen their financial position. This could involve recapitalization (a restructuring of the debt-to-equity ratio) or refinancing debt to minimize interest payments. This can help the business fund new strategic initiatives or prepare for a liquidity event.

Preparing Your Business to Raise Money

Securing funding requires thorough preparation, strict financial discipline, and meticulous record keeping. Expect investors and lenders to conduct extensive due diligence before committing capital to your business. To ensure you’re prepared, take the following steps:

• Maintain strong financial hygiene with accurate bookkeeping, transparent financial reporting, and adherence to Generally Accepted Accounting Principles (GAAP).
• Engage in financial forecasting and modeling to determine funding needs, profitability timelines, and expected return on investment.
• Track key performance indicators (KPIs) such as customer acquisition cost, gross margins, revenue growth, and cash flow trends to showcase financial health.
• Use investor-ready reporting strategies such as investor decks that include financial summaries and KPIs in a clear and compelling format to establish credibility with investors.

Navigating the Capital-Raising Process

Get support from experienced financial professionals. Experts like financial advisors, outsourced CFOs, and tax professionals can help businesses compare debt and equity options and negotiate favorable terms.

Once you begin your capital-raising journey, follow these steps to maximize your opportunities:

• Craft a Compelling Narrative: Present your company’s vision, mission, market opportunities, competitive advantages, and growth potential to investors. A well prepared business plan and pitch deck will effectively convey these points.
• Prepare for Investor Scrutiny: Ensure that all necessary documentation is organized and readily accessible.
• Negotiate the Deal: Carefully navigate negotiations to secure the best possible valuation for your company. Clearly define all funding terms and investor expectations.
• Maintain Strong Relationships: After securing funding, stay engaged with your investors and lenders. Provide regular updates, financial reports, and strategic communication to support a successful long-term partnership.

How Stable Rock Can Help

Stable Rock specializes in outsourced back-office solutions, including CFO advisory, accounting and finance, investor reporting, tax strategy, HR, IT, and more. Our expertise in strategic finance allows us to help businesses navigate the complexities of business fundraising and effectively manage investor relations. We provide the support your business needs to prepare financial models, refine investor messaging, and ensure GAAP compliance, empowering you to secure funding and manage it successfully.