Raising capital is the process a business undergoes in order to raise money for growth and expansion. Raising funds is an essential part of growing your business and taking it to the next level, whether you’re at the beginning of your entrepreneurial journey, a startup or a fully established company. Having access to funds can mean the difference between companies expanding, and being left unsuccessful and unable to progress.
There are two main types of raising capital that a company can use to finance necessary operations; debt and equity, both of which will be explained in this article.
Why is Raising Capital Important?
It is impossible to start a company with no funding, therefore raising money is the first step to getting your business off the ground. At some point, almost all businesses will need to raise capital, especially start-up business owners who don’t have disposable funds that they can use to fund operations. With additional funds, your business can expand and subsequently meet fundamental milestones much easier. A solid investment can help to bring your product to market or fulfil existing orders and allow you to take integral steps to your business goals.
Capital raising can also be a great opportunity to build your network. Investors are often experts in their trade with a plethora of knowledge which can be used to mentor young entrepreneurs and startup companies. Investors often also have connections to different companies that could significantly help your business and provide an excellent wider network that would not otherwise be available.
How to Raise Capital
There are two main types of capital that a company can employ to raise funds. Running a business requires a great deal of capital and every business is different. The financial capital for one company can be entirely different to another depending on its current financial status and financial goals.
There are two main ways that corporations can raise capital:
Debt raising is the exchange of debt in return for capital. When a business chooses to fund its working capital with a loan, they are able to retain the funds from an outside source which subsequently incurs a debt to that source which will then need to be paid back with interest over time. The most common ways of debt raising are loans and bonds, which companies can use to pay to expand their plans or fund new projects. Smaller businesses and startups often use credit cards to raise their own capital.
The other option is for the company to issue a corporate bond which is sold to lenders or investors. A corporate bond is a type of debt security which can be issued and sold in order for the company to gain the capital that it needs and the lenders are paid a fixed or variable interest rate. A lender who buys a corporate bond is essentially loaning money to a company in return for interest payments.
The Cost of Debt Raising
The cost of debt is the interest payment to the bondholders and lenders. When a company raises debt, it commits to paying a principal amount and compensating its bondholders by making interest payments annually. Borrowing enables you to retain full ownership of your business but means that you will be committed to repayments which can slow down the growth of your company in the long run.
Equity raising is rendered through the sale of shares of company stock rather than direct borrowing. Examples of equity raising include investments often made by venture capital firms, angel investors and any other business owners who sell their shares. Equity financing is often used by startups to stimulate the financing and growth of their business.
Equity funding can be raised from any of the founder’s investors; friends and family, crowdfunding platforms, angel investors and networks, government funds and corporates. As a company matures, it will then need to consider venture capital if additional funding is required. If someone is willing to invest in your company, it means that your business is projected to generate a positive return over time.
The main difference between debt raising is that equity raising involves selling a portion of the equity in the company which will eventually benefit an investor rather than borrowing money.
The Cost of Equity Raising
With equity raising, your business is not required to repay any shareholder investment or borrower amount. The cost of equity represents the compensation that is demanded in exchange for being a sharer or owner of an asset. The cost of capital, typically worked out using the weighted average cost of capital, includes the cost of debt and the cost of equity. Investment delivers a monetary injection that does not have to be repaid, however, you will have to share the growth of your company with your shareholders.
How to Raise Capital for a Startup
Financial growth is arguably the most important part of startup companies and new entrepreneurs. Equipment, boosting production, staff and many other aspects of starting a business require finance which is often difficult to retain when you are a brand new company within your field. The main choices are whether to borrow or seek investment.
There are three main types of investors who typically aid startup companies:
Usually a high net worth individual that will invest in a new or small business, providing capital in exchange for equity within the company.
- Venture Capital Investors:
Private sector firms who have dedicated finance to draw from corporations, foundations and organisations.
Most new entrepreneurs and startup companies will have a group of people close to them who either invest in shares of their startup companies or lend capital.
Raising Capital for Your Business
Whether you are a younger firm looking to raise capital to get your business off the ground, or you’re an already established company needing financing, raising capital is an integral part of being a business owner. Both types of financing have their pros and cons, however, the correct choice will depend entirely on your company, its current business profile, present financial condition and your future financial needs.
Debt raising is excellent for those needing to borrow money from a bank, lender or corporate bond. Regardless of how you are lent the money, the loan will need to be paid back in full, plus interest. Equity raising works for those willing to share a percentage of ownership in your company with investors who are willing to pay for their portion.
Regardless of which capital raising option is most suitable for your company, you will enter a fixed-term commitment with your investor or lender, meaning that it is crucial to pick the method best suited to your business. When looking to raise capital for your company, you need to consider what works best for your particular requirements and whether you will benefit long-term from the option in your circumstance.