Capital gain is a gain or profit that arises from the sale of a ‘capital asset’ and comes u...
“Capital is the backbone of every business” – The quote digs into the importance of capital for the existence of a business entity. Capital is the utmost need for commencement, growth, and expansion of every business. The growth of a business is relevantly depended on the ability of the entity to raising capital. Therefore, having a source of finance plays an important role in shaping the structural growth of the business.
Interestingly, procuring capital for business commencement or expansion is an intelligent process. It takes strategic maneuvers to procure the right amount of funds from the right resources at the right time. The strategic ways by which capital can be raised should be utilized in appropriation to the requirements of the business.
However, raising funds as per the ideal requirements of the business may not always be possible. Moreover, raising funds in an unplanned manner is also a matter of concern for the organizations as it influences the growth and control aspects of the business. Therefore, it becomes utter responsibility for any business to know about the sources of business funds, strategy for raising funds, and know about the benefits of different sources of funds.
There are different sources of raise funds for the business. But before going further, we need to understand the capital structure. Capital structure defines the characteristics of the capital fund employed by the business. Typically, most of the business uses a combination of debt and equity capital to fund the operations of the business. The choice of source of capital for a company plays an important role in the process of capital formation. Different types of capital structure are constituted to suit the specific capital requirements of the business.
The capital structure comprises long term and short term needs of the business. Therefore both long term and short term sources of finance are taken into consideration to raise funds for the business. Equity shares, preference shares, bonds, debentures, term loans, venture funding, represent the long term sources of finance. On the other hand, trade credit, bills of discount, business advances, and commercial papers, represent the short term sources of capital funds.
Debt capital or Debt finance can be described as an external source of funds for the organization. Raising debt capital creates a financial obligation for the entity to repay after a certain time with interest on the principal lending. The entity and the lender enter into a contractual relationship to execute the transfer of funds. Bank loans, Individual lending, bonds, and debentures are common examples of debt capital.
The benefit of debt capital is that it does not take a share in equity and therefore, does not dilute the rights on the company’s profit. However, it possesses certain disadvantages, such as payments of interests and contractual financial obligations to honor. Dishonoring of such obligation can lead to legal consequences against the company.
Equity capital is the raising of capital by giving away shares or sharing part ownership with the fund provider. In this mode of fund generation, there is no obligation to return the funds to the investor. Instead, the investor shares ownership of the company and share of liabilities and risks associated with it. Equity capital can be raised by the issue of preference share or common shares. Preference shares are the one which is provided with the first right to the dividends in case of profits for the entity. The returns against the advancement of funds come in the form of dividends or an increase in the valuation of stocks held by them.
Also, Read: How to Raise Fund in NBFC, Is FDI a Good Option?.
Angel investors can be from any corner of the contact network. They are the first outside investors in the business. They can be from family, friends, mentors, etc. The drawback with angel investors is that they do not have a huge sum of funds but sufficient enough to provide a launchpad to startups.
Venture capitalist represents the investor fraternity that invests in big numbers. They invest in startups in a huge amount but do takeaway large share in equity.
Taking a bank loan is the most common medium of rising for the business. Banks offer capital investments against the collateral of assets of the business.
Incubation cells are the breeding ground of startups. They support startups from the idea stage to a mature and working entity. They also provide investments or loans to the startups that seem promising to them.
Investment bankers and investment banking institutions act as a bridge between potential investors and businesses seeking investment.
A relatively new concept in the field of capital investment is crowdfunding. A business using crowdfunding platforms seek investments from the public in a large number of stakeholders.
Having an optimum amount of capital acts as a catalyst for the growth and expansion of a business. Raising an insufficient amount of funds or over availability against debt funding is deleterious to the business. Therefore, it is inevitable to ensure that capital is being raised in the right proportion after an adequate survey of the requirements and the state of the business.
Checkpoints to consider before going for fundraising;
Every business entity wants to raise the maximum amount of capital by giving minimum consideration. However, every investor thinks the other way round. Therefore to have realistic expectations is mandatory in order to crack the code of getting sufficient capital investment for your business. Seeking unrealistic expectations with the capital funding will not only lead to disappointments but also lead to total failure of the journey to seek capital investment.
It is important to research the availability of investors that can provide funds to the business. Having a larger pool of potential investors provides higher chances of raising your desired amount of funds or negotiates a better deal in equity. Having appropriate information about investment sources helps to raise funds from more than one source.
Much has been talked about raising investment but how to presenting in the most presentable way? This is exactly what we address under this head. Having a pitch deck for potential investors is the right way to present your fund’s requirements and position of the business. An investor’s pitch deck contains fundamental details about the company, such as business concept, competition, target market, business scope, etc. The potential investors decide the prospect of considering investing in the entity after a detailed study of the pitch deck
Having a well documented adds an icing on the cake while presenting the investment pitch deck. The business plan is the roadmap to the projected growth of a business entity in the coming times. Therefore, a well-researched business plan consisting of activities related to research, operations, marketing, provides a base to initiate a call to action for investors.
There are always limits to the number of investors a single entity can have in their network. Whereas professionals such as investment bankers have a sound network of investors and venture capitalists. It is advisable to take help from experts in providing investments to businesses. Investment bankers or investment groups can be of great help for any capital seeking entity.
Recommended Article: Important Rules for CEO and CFO when Raising Funds.