Capital raising is the procedure of increasing monies to fund business transactions, transitions, or ventures. The ultimate goal of capital raising to increase the company’s operating profitability and provide a long-term return on investments. Many companies make use of their own financial resources to raise capital. However, in the current economy, many small businesses have lost their jobs or are looking to go through a consolidation or debt restructuring. A large majority of small businesses have little or no assets, which makes raising capital a very difficult process.
If you own a small business and are looking to raise capital, then there is a special set of options available to you. You should conduct research and create a capital raise checklist that will guide you through the process of raising the appropriate amount of funds for your business. Read on to see how capital raising has evolved in the wake of recent economic upheaval.
The Two Choices
The solution for such financial instability has changed the entire capital raising sector: debt and equity. The effects are still being felt across the globe.
This is because, over the last few years, equity has become the more stable source of financing. As capital raising in equity is risk-free, investors have been increasingly encouraged to offer this as a possible investment vehicle.
Debt Values
In the past, debt was always the preferred option for raising equity capital. This is because equity capital was not an easy source of funding. It required high credit ratings and was considered too risky. Debt has thus been viewed as a way out of the economic crunch – instead of being a long-term solution, it offered quick results.
- Steady Returns
In the current scenario, debt financing is considered a viable option as it submits a steady stream of returns that will help small- and medium-sized companies keep afloat. With a stable cash flow, debt financing can help businesses expand their market reach. This is because debt capital helps businesses stay focused on their business goals and objectives. It is a great way to avoid distractions that occur with other forms of capital raising.
- Lower Interest Rate
Of course, debt capital cannot be relied on to keep every company operating in business. It is a risky form of capital financing. If a business owner defaults on their loan repayments, they face a huge loss. However, if the business owner is able to pay their debt in full, the business owner will benefit from lower interest rates and lower monthly payments. This lower interest rate may translate into significant savings for the actual business owner.
Equity Values
Conversely, equity capital does not pose any risks to the business. Unlike debt capital, equity capital is a fixed return on an existing asset – the equity holder does not have to make future payments. This makes equity financing a popular choice for small businesses that already have assets that are worth investing in. Since most business owners own their own building and possibly some land, this option allows them to raise capital quickly.
- Fast Pace
There are many benefits to raising capital using equity. Since business owners are not tied to the security of their investment, equity capital enables businesses to grow at a fast pace and reach new heights. Small businesses may then be able to take advantage of new markets and business opportunities that they could not reach before, due to their lack of financing sources.
If a business owner is planning to raise money through equity capital, they must consider several factors when considering this option. Some of these factors may include whether or not the business is considered a high-risk business – whether it has any significant liabilities that may must be repaid. The amount that is required also ought to be factored in, as well as the ability to pay back the loan on time. If all of these elements are considered, business owners can choose a funding source that is the best suited for their unique situation.
While high risk is a consideration, it is also important to consider the amount of capital required for any type of loan. This amount will depend on the type of business and its current standing. For example, if the business is considered a high-risk business, it will likely require a larger amount of equity than a business that is considered low-risk.
- Security
Equity capital also requires the business owner to provide security, which means collateral, to protect the business. Collateral is very often used to secure loans. However, if the business fails to meet its financial obligations, collateral will not be needed. This is another factor that should be considered when thinking about the right kind of capital raising method for the business.
Although very tempting, equity capital does have its own set of challenges. This includes maintaining a consistent level of profitability and minimizing losses while providing a steady stream of income. This is why some business owners opt to take on new financing sources.
Conclusion
Raising capital can be challenging, especially for small businesses. However, with the proper research done and the choices available for assistance through debt capital or equity capital, there is hope for a financially successful endeavor for any company.