How Do Firms Raise Capital?
One of the most basic rules of business is that you must spend money in order to make money. As start-up firms get underway and as established firms try to grow, they need money to spend. This money can come through a number of different avenues. Of these, there is no "best" option; there is only a best option for your particular firm.
Other People Are Reading
-
Identification
-
In economic terms, capital is something that an entity holds and uses to generate wealth. It can be liquid assets such as cash, or it can be actual holdings such as real estate, industrial equipment, specialized software, transportation or even contracts. These and other items are all capital, in that they give the firm the capability of generating revenue. When people talk about "raising" capital, though, they generally mean liquid assets that a firm secures through loans, grants or investments.
Significance
-
Capital is the lifeblood of any thriving economy. As in nature, in economics, growth is synonymous with life and health, and capital is the principal means of bringing about growth. When firms cannot raise capital, they cannot grow, meaning the economy as a whole cannot grow, and new jobs cannot come into being. When firms can raise capital, they can spend that capital on essential items that allow them to increase total revenue, which results in an increase in buying and selling in the market in general.
-
Types
-
With a secured loan, as with other types of loans, a firm gets money from a lender at a specified rate of interest. The loan is "secured" because the firm agrees that, should it fail to repay the loan, the lender can seize some of its actual holdings, such as real estate.
Some firms can get "unsecured" loans in which the lender bases its loan decision on its belief that the firm will succeed in meeting its goals for growth.
In order to grow, some privately held companies opt to incorporate. Incorporating means that the firm becomes a publicly traded company with a large number of people each owning a small piece of it.
For start-up firms, a common way of pulling in the necessary cash to get going is by pitching their ideas to angel investors and venture capitalists. These professional investors evaluate the feasibility of the business's success and contribute much-needed start-up capital in exchange for a percentage of ownership.
When a business aims to accomplish specific goals that a government deems beneficial to the community in a specific way, such as improving the environment or giving opportunities to people with low income, that government may extend business development grants.
Benefits
-
The principal benefit of secured business loans is that they are relatively plentiful and easy to attain. Also, so long as the firm faithfully makes payments on the loans, it does not need to relinquish any control of the business or its assets to another party.
The principal benefit of unsecured loans is that, though the firm is still liable should it default on its loan, it does not need to provide any collateral in order to get the loan. This is helpful for small firms that do not have many assets and for large firms that do not want to deal with the complications involved with getting a secured loan. However, most unsecured loans come at a higher interest rate than secured loans.
Incorporation is possibly the fastest way to raise capital for growth. However, by incorporating, you are essentially selling the firm, or a large part of it, and so, even if you expect your income from the firm to increase, you can expect to lose a certain portion of control over it.
Though relying on an angel investor or venture capitalist for cash comes at the price of a certain percentage of your firm's income, it does give much-needed financial help to a business that would not be able to obtain sufficient money through a bank loan.
Government grants mean free money. However, these grants are few and far between, and in order to qualify for them, your firm must meet stringent requirements.
Warning
-
Before you seek capital for your growing firm, make sure that your plans for expansion are sound. Investigate all of the possibilities, and acknowledge every way in which your business ventures could fail. If your business plan is not sound, you will probably not be able to get certain types of capital, such as unsecured loans or venture capitalist investment. However, a financial institution may be willing to give you a secured loan in such a situation if you offer substantial assets as collateral. Beware of such situations, as you stand to lose whatever you provide as collateral.
-
References
- Photo Credit money, money, money image by easaab from Fotolia.com
