Capital raising refers to a process undertaken by businesses to secure the funding required to start, operate or grow that business. No matter what stage a company is at, raising capital is a necessary requirement.
There are two main types of capital raising: debt capital, such as taking out a loan or credit card, and equity capital, which involves selling shares in the company in exchange for finance.
Kevin Neal has been involved in raising funding and capital throughout his career, drawing on his experience as a former independent financial adviser.
Within both debt and equity financing, there are various methods and sources a business can use to secure the capital they require.
Debt financing involves the business borrowing a sum of money under contract to repay that money, usually plus interest, within a certain period of time. The two most commonly used types of debt financing are loans and bonds.
With a loan, the company borrows a sum from a lender such as a bank and commits to making repayments until that sum plus an agreed rate of interest has been fully repaid.
Corporate bonds are another option; these are sold to investors to raise immediate capital, with the company then paying the investor interest payments until the bonds reach a pre-agreed date of maturity. These types of bonds pay a relatively high yield to investors, as they come with a higher level of risk than other similar investments such as government bonds.
Equity financing raises money for the company that does not have to be repaid, as the investor is given shares in the company in exchange for their capital. There are two main types of shares that can be issued.
Common shares provide the shareholder with the right to vote at board meetings but come with few other perks. Holders of common shares are the last to be repaid if the company liquidates.
Preferred shares do not confer voting rights on the shareholders, but they do guarantee payment of a specified dividend before any common share payments are made.
Realistic Capital Raising Goals
No matter which capital raising route a company chooses to go down, it will have a better chance of success if the owners or management are realistic about the amount of capital that will be required from the offset.
Entrepreneurs are often optimistic which, although a positive quality, can result in forecasts and predictions which do not come to light. Being realistic about the required amount of capital – while accounting for a variety of possible scenarios rather than just the best case – helps ensure enough capital can be secured to see things through.
Know Your Investors
A large part of successfully securing the capital a business requires comes from knowing which investors to approach, as well as ensuring that all the relevant information and documentation is in place before approaching them.
Some projects will benefit from appealing to investors with local knowledge, for example, while others will be more attractive to investors with an international scope.
Approaching the right investors armed with an in-depth business plan and well thought out projections can make the difference between securing the capital and going home empty-handed.