Raising Capital
Many entrepreneurs have great ideas. Financing those ideas is what they don’t have an idea about. The art of fundraising to an entrepreneur is not a skill, it’s a necessity. Many entrepreneurs fail and have great ideas that have not taken off because they always want to finance their ideas by themselves. If you have the finances for that, is OK, but most don’t have the finances. And that’s when raising funds becomes a necessity.
There are many ways of raising funds, and they all fall under two categories. The first one is Debt Capital and the second one is Equity Capital . There is none that is better than the other, there is only one that works for your business.
DEBT CAPITAL
Debt capital as the name implies is raising capital for your business with debt. There are two ways which this can be done. The first way which is the most popular is: Loan.
Loans are a great way of raising capital, and it’s the easiest. Once you have a collateral or a good financial tract record, you’ll find institutions or individuals that are willing to lend you money to finance your business. There is little convincing to be done; unlike the other methods.
Bonds or Cooperate Bond is also a good way of raising capital for a business. Bonds are agreements that a business shares to the public to certify that they are indebted to that individual or organization. What that means is that your business can create bonds (through a lawyer) and share it to the public so that anyone interested can buy that bond and lend you a particular amount of money for a period of time. And your business will payback that money with interest.
The major differences between loans and bonds it that loans are usually offered but big institutions (mostly banks), and usually requires a collateral. While bonds are opened to the public. Just about anyone being it an individual or an institution can buy your bonds and lend you money. Another difference is that loans comes as a whole. Lets say your business wanted to raise $100,000 a single bank can lend you that money. Whereas bonds comes in pieces. So you sell the bonds to 100 people and organizations and each can lend you $1,000. Lastly bonds are usually offered by established businesses while loans are for every business.
EQUITY CAPITAL
Equity capital is capital raised not from borrowing money, but from selling shares of the company’s stock. Shares represents ownership of the business. This legally frees the entrepreneur from any liability that may arise when the business goes under. But on the other hand, the entrepreneur does not have full control of the business. The ownership is DILUTED. And the entrepreneur may even end up loosing ownership of the business as it was it the case of Steve Jobs with Apple and Elon Musk with Paypal. Equity capital help in keeping the entrepreneur accountable, thereby forcing the entrepreneur to be more responsible with the company’s resources and decision making.
There are two types of stocks that a business can issue. The first one being Common Stock and the second one is Preferred Stock.
Common Stocks gives shareholders voting rights. This stocks are usually given to the founding team and early investors. The stock price is usually low, because the stocks are issued when the company’s valuation is low; usually at the start of the company. These shareholders are given less priority: that is if the company goes under or liquidates, the get paid last. Board members on a company’s board are usually the owners of the stocks.
Preferred Stocks on the other hand have limited ownership of the company. And they don’t have voting rights. But payment of any dividend are paid to them first and if the company goes under or liquidates, they get paid first.
Equity capital usually favors the entrepreneurs, and that’s why most startups tends to use it. If the business fails, the founders themselves have no liability to pay the investors or if the idea they funded with the capital fails, their business or its assets cannot be seized or collected by anyone. Unlike with Debt Capital. But the disadvantage for most entrepreneur is that they no longer control the business and may end up losing ownership of the business completely. Equity Capital also favors the investor because it gives them ownership of the business. An investor can invest $10,000 to fund a business and that investment may end up multiplying to $100,000 in 5 years. That a 1000% profit. Compared to Debt Capital which can only multiply to 10% profit at the same period of time. But the risk is greater with Equity Capital than Debt Capital.
Choose for yourself and your business which is better for you. And I wish you good luck raising funds or investing.
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