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Capital Raising Process

The most important thing for an entrepreneur is to turn their vision into a successful and profitable business. Most of the time they need access to capital in order to do this. The dilemma they face when raising capital is doing it in a way that doesn’t end up with them losing control over their business and their dream.

It is a major challenge to raise the capital needed for starting up a business or expanding it without losing control over it, but it is possible. The most important thing to keep in mind when facing this challenge is to look at what stage of development your business is in and raise investment capital for what is needed at that stage rather than for the whole shebang.

It is every entrepreneur’s dream to raise all the money needed upfront, but you need to balance the need for capital with the desire to control the establishment and growth of the business. The best way of doing this is to find a source of capital investment that best suits the stage of development your business in.

How to raise capital for investment?

Essentially raising capital for investment is needed when money needs to be spent now in order to generate profits in the future. This could be investment in a piece of equipment, a plant, or research and development, for example. Financial capital can be raised in four main ways:

1 Start-up investors

A business that is just starting generally has an excellent business idea or a prototype for a product but do not yet have any customers. Or, if they do, they only have a few. These businesses are not yet earning profits which puts them in a difficult position when raising capital because they cannot yet show how they are going to be able to provide a return on any investment in the business.

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2 Reinvestment of profits

If a business is earning a profit from existing revenue then this will be a primary source of investment for further development. Often start-ups can offer attractive investment opportunities but haven’t yet earned enough profits to be able to reinvest in the business. Even established businesses will find themselves in a position where they don’t have enough profits to reinvest dur to earning low profits or having suffered losses who have earned low profits or experienced losses?

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3 Borrowing through banks and bonds

If a business has a track record of earning substantial revenue or generating healthy profits, or they have valuable assets they can use as collateral, it will be possible for them to borrow money through banks and bonds. Business loans from banks work the same way as personal loans whereby they borrow a sum of money which they promise to repay with interest over a set period of time. If they should fail to pay their monthly payment the bank can take them to court in order to force them to sell assets in order to cover the loan amount.

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4 Selling stock

If a business “incorporates” it is a corporation that is owned by a number of shareholders. These shareholders have limited liability when it comes to the debt of the company but own a share in the business’s profits and losses. A corporation can be privately or publicly owned which will determine how their shares are traded. A corporation can raise investment capital by selling stock or issuing bonds.

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Methods to raise equity capital

Equity capital is raised by selling a share of your business to an investor. The investor gets a return on their investment through profits as opposed to through repayments. Equity capital comes with a proportional amount of loss of control over the business as all shareholders have a say. However, this is often the only way in which a start-up is able to raise investment capital.

You raise equity capital by identifying equity partners to approach. The best equity partners to approach are:

  • Other companies who work along similar lines or offers similar products and services as your company.
  • Angel investors who can be found on websites which are dedicated to connecting companies with potential equity partners.
  • Your family and friends.
  • Loyal and committed staff members who have as much passion for your business as you do.

Whoever you approach to invest in your business or loan money to your business will need you to present them with a comprehensive business plan and financials. You should also ensure that you consult with an attorney before finalizing any equity deal so that you don’t give away too high of a stake in your business or lose too much control in it. The need to raise equity capital usually comes at a time when a business, and its owner, is most vulnerable which can lead to desperation and settling for a deal which diminishes earnings and compromises the business.