How do I Raise Capital Debt Financing or Common Stock Financing?
There are two ways to finance the needs of a business, either by debt financing or equity financing. Debt financing is simply using debt or borrowing money to finance purchases and pay bills. Capital debt financing refers specifically to borrowing money (also called "capital") for the explicit purchase or financing of real property, machinery or capital improvements (e.g., factory upgrades) or taking care of working capital needs (e.g., paying short-term costs and expenses).
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Instructions
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Debt Financing
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The most straightforward way to raise debt for a business is to get a commercial loan from a bank. For small to medium-sized businesses, banks will ask that these loans be collateralized with the business owner's real property, such as a house or investment account. These loans are paid back over a fixed period of time with an agreed-upon interest rate. A revolving line of credit is a specific amount the bank will loan a business that must be paid back in a specific time period. However, when the loan is repaid, the business can borrow the same amount again with the same terms without initiating more paperwork. Sometimes, entrepreneurs are willing to lend money to businesses for terms similar to banks. Equity financing comes directly from the company or its owners. Profits re-invested into the company and not distributed as dividends is a form of equity financing.
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A business need not be publicly traded to raise debt in the public markets. Floating a bond is another way of using debt for financing purposes. Bonds are a specific type of loan where a company, or the government, borrows funds from investors and pays the principal back at a pre-determined date. Interest can be paid back in increments over the loan period or accumulate and be paid in a lump sum with the principal. Bonds can have terms of anywhere from one day, called commercial paper, to 30-years, such as U.S. Government Treasury Bills.
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If a company is not creditworthy enough for a loan or a bond but has sufficient cash flow to make regular payments, leasing may be an ideal option for real-property and equipment acquisition. Many lease contracts have a discount purchase option, entitling the lessor to purchase land or equipment at the end of the lease term for a "balloon" payment, which counts previous lease payments toward the purchase price. Accounting and tax treatment vary from lease contract to lease contract, But many contracts can help improve net income and productivity ratios and even create tax benefits. While it cannot pay for working capital needs, it is genuine debt financing if used for acquisition.
Equity Financing
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One way of raising equity capital is for owners to give the company money the company by investing their own private resources or to forego dividends and re-invest the profit back into the company and increasing the account called "Retained Earnings."
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Bringing on additional partners who contribute money, goods or services to the organization raises equity capital. For example, if Chris and Pat own a business that is doing well but doesn't have the ability to expand and ask Lee to join the company as a partner with a cash investment, Lee becomes an equal partner and the company has capital it need not re-pay as debt. The upshot is that company dividends, if not re-invested, are split between three owners and not two. Venture capital firms specialize in becoming partners in businesses they believe will prosper in the future. They will invest equity capital for a period of time to help the business grow and will often asked to be bought out when the enterprise is more established financially.
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Going public refers to the ownership of a company being sold to the public in the form of common and preferred stock and then traded on an exchange to individual and corporate investors. Facilitated with the help of an investment bank that charges a fee, money from stocks sold at the initial public offering, or IPO, goes directly to company coffers. A company need not be established to go public, many successful start-up companies go public within five years of inception to finance the cost of growth.
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Tips & Warnings
After going public, many previous owners stay with the company as managers and executives. While their expertise may have been valuable to bring the company to its IPO, if stockholders, the owners of the company, do not like management policies, previous owners can be removed from their positions by a shareholder vote.
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