Whether your business is big or small, raising capital is one of the main challenges you’ll face. Capital is the sum of money that your firm has available to spend on various business activities. Securing a substantial amount of capital to meet all of your business’s needs is challenging. It takes determination, patience, and in many cases, help from others.
Raising capital is a must to start and fund any new business venture, but where do you even begin?
Today, raising capital can take many forms. The digital age has brought about new ideas and resources for business starting out to secure the funds they need to become successful. But, how did well-established companies with 20 plus years under their belts get where they are today?
We’re going to break down some of the most successful strategies for how to raise capital that young businesses starting today and mature businesses with decades of success have used to great effect.
Types of Capital
To start, let’s define some of the most common forms of financial capital:
Debt Capital When you think about securing a lump sum of money that you don’t already have, the first thing that probably comes to mind is debt capital. This can include anything from bank loans to personal loans to overdraft agreements, to credit card debt. Debt capital is borrowed with the expectation that it will be repaid to the lender at a later date, usually with interest.
Equity Capital Unlike debt capital, equity capital does not need to be repaid. With equity capital, you are selling a portion of your company (shares) to an investor. This investor will purchase shares of your company, typically in hopes that your business will grow and their shares will increase in value. Equity capital refers to funds that are generated by a sale of a stock that is derived from either common or preferred shares.
Capital Raising Strategies for Young Firms
Today, there are many different ways that a young firm can raise sufficient capital to start their ventures.
Family and Friends Family and friends are always a good starting point for young firms. Family is usually willing to support you in your ventures, and when the bond is strong, it can relieve some of the pressure of paying the money back in a short time frame.
Angel Investors When looking to start or fund a new venture, many young businesses would love to have a guardian angel that could give them exactly what they need. Unfortunately, it doesn’t work that way. Thankfully, however, there are angel investors. These investors are wealthy individuals who enjoy helping entrepreneurs in their business ventures. In most cases, these investors don’t just hand out money freely to young firms in need; they expect to see a proper business plan that shows when and how they will see a return on their investment.
Crowdfunding While the principles of this type of capital raising strategy are simple, it has become a new norm for young or brand new firms. Crowdfunding is the practice of raising capital through small amounts of money from a large number of people. This has exploded in the internet age, and there are multiple platforms a young firm can use to set up, promote and secure funding.
Capital Raising Strategies for Mature Firms
Why would a mature firm need to raise capital? In some cases, when a mature firm wants to grow its business, acquire another company or expand its market reach, it will require more capital than it has on hand. When it comes time to raise capital, here are a few strategies mature firms typically use.
Using Profits First, a mature firm can leverage its profits to fund new ventures. Depending on the scale of the venture, they may be able to fund it all out of their own pocket, without having to worry about repayment.
Banks and Traditional Lenders Most mature firms have long-established relationships with banks or other lenders. This often allows them to leverage those relationships to secure capital at a lower interest rate. Even if a mature business doesn't have a relationship with a single bank, their portfolio and reputation can help them in getting a loan or investment.
Selling Shares Another way a mature firm can raise capital is by selling shares of their company. An investor can purchase shares of the business for an agreed upon amount, essentially giving them a piece of ownership in the company. This allows investors to share in the company’s profits as the business grows.
Issuing Bonds Issuing bonds is another common way for mature firms to raise capital without losing too much ownership control. A bond is a loan between an investor and a business. The investor agrees to give the business a specific amount of money for a designated period of time in exchange for repayment at regular intervals. When this agreement and loan reaches its maturity date (the end of the agreed upon term), the investor’s loan is repaid.
Issuing a bond rather than taking out a loan from a bank allows mature firms to avoid high interest rates and retain their freedom to operate without restrictions from a third party.
Similarities and Differences
Whether young or mature, all businesses usually reach a point where more capital is needed to accomplish their goals. Many similarities exist in the ways these types of businesses can go about securing and raising capital, but there are some important differences to note.
Young businesses are more likely to have to give up a part of their ownership or management control in order to secure capital. This isn’t always the case, but some investors will want to be involved in the decision-making process. For example, if you are a young business looking to secure equity capital, you might come across an investor that will only lend you money if you adhere to certain conditions. This may change things like where your business operates, who the managing partners are, or overall business communications.
Mature businesses have more leverage on their side. Because of their established status in the business world, they likely will have more willing investors. When there are more investors ready to lend money, a mature business has more options for borrowing money and is less beholden to the whims of individual investors.
Another key difference is interest rates. In most capital lending cases, both young and mature businesses will incur some interest during their repayment term, but a mature business with a robust profile may be able to secure a lower rate from the lender.
Learn How to Raise Capital for Any Firm at KU
Raising capital can be a necessary action at any point during business growth. No matter if you are just starting a new business or if you are a leader in your industry, the strategies outlined above are great ways to raise capital for your next venture.
Learn more valuable business development techniques when you earn an online MBA at the University of Kansas.