Professional Documents
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Raising Capital
Raising Capital
What is Capital?
Capital — specifically capital in the form of cash — is the lifeblood of any business. New
businesses need capital to pay the deposits required to rent office or manufacturing
space and to pay newly hired employees, and established businesses need capital to
grow, to develop new products and services, and to provide a return to shareholders.
STAGES OF FINANCING
1. Seed Capital and Start-up
2. Expansion
3. Acquisition
Here’s a quick and easy way to get a general idea of how much money you’ll need to
target in your efforts to raise capital
Determine your projected sales
Calculate your start-up costs
Tally up your recurring costs
Tapping into Your Personal Resources
The very first thing that many people think of when it comes to raising capital is
tapping their own resources — savings accounts, retirement plans, home equity, credit
cards, and more. Why? Because it’s quick and easy.
Taking a Dip (into Your Savings)
Credit Cards
Turning Your Home into an ATM
Understanding how home equity loans work
- Two major types of home equity loans exist:
o Term equity loan – it provides you with a lump sum of money to use
as you see fit.
o Home equity line of credit - Like a credit card, a home equity line of
credit enables you to draw any sum of money out of your home equity
account up to a predetermined cap and to pay it back over time — in
part or in whole.
The Rolodex Round
When a business is first getting started, the potential sources of capital are few
and far between. Your own resources are a logical first place to look how to tap into
your savings, your credit, and so on.
- Pounding That Rolodex - When you’re looking for start-up money, it pays to
be diligent and far-reaching in your initial efforts, but you can start with the
folks closest to home.
o Family
o Friends
o Teammates
o Fellow members of organizations
o School Ties
o Fellow Business Travelers
o Professional Contacts
Angel Investors
Angels do exist, but they aren’t sent from heaven. These angels are actually
angel investors, and they have saved many businesses from failure by providing them
with the capital they needed just when they needed it.
The only qualifications for being an angel are the following:
Possession of sufficient capital
The willingness to devote — or, actually, to wager — a portion of personal
capital to high-risk, potentially high-reward investments.
Accredited” status
Customers and Vendors
Believe it or not, vendors (the companies you buy from) and customers (the folks
you sell to) are often happy to provide financing to companies just like yours, either
directly or indirectly.
Matching Services
For a young or small business without much of a track record, matching services
— putting you together with angel investors, venture capitalists, and other potential
investors — can be just the ticket for finding needed capital.
EXPANSION
For established businesses that are well past the start-up stage, have
established a track record of success, and are looking for capital to finance further
growth and expansion, second-stage financing provides many more sources of capital
from which to draw.
Commercial Lenders
Every industry and business has its up cycles and its down cycles, and loans
provide a ready source of cash to help businesses get through those inevitable down
cycles.
Loans are one of the most popular ways for businesses to obtain financing.
Different kinds of loans
- Business Loan
- Line of Credit
- Receivables Financing
- Inventory Financing
- Equipment loans and mortgages
Placement Agents
The function of a placement agent is, as the name implies, to place securities —
that is, to raise funds for a company that’s in the market for capital. The agent helps the
company and its management sell a security, but it doesn’t do so in a vacuum.
The Small Business Administration
For many business owners — especially small business owners — raising capital
means getting a loan from or guaranteed by the Small Business Administration (SBA).
The SBA specializes in serving small businesses — large businesses need not apply.
Venture Capital
Venture capital simply means money made available to growing firms by people
(“venture capitalists”) who take a major stake in the company’s ownership (and often
management) in exchange for their cash. In more specific terms, venture capital refers
to pools of money contributed by unrelated investors to a structured activity that
conforms to definite (albeit changing) patterns and rules and that is organized into
separate legal entities that are managed by experts according to stated objectives set
forth in a contract between managers and investors.
Valuation
The amount of money that you’ll be able to raise is dependent in large part on the
value assigned to your business. Investors are willing to free up far more capital for an
opportunity that is assigned a high value than they are for an opportunity that is
assigned a low value.
Lease Financing
Lease financing, a long-term form of renting equipment, has taken the business
world by storm. The leasing business is booming, and for good reason: Leases offer a
variety of advantages to companies that use them.
What is Lease?
- A lease is a contractual arrangement whereby an individual or company that
owns specific business equipment or property (the lessor) allows another
business (the lessee) to possess and use the equipment or property in
exchange for cash payments or other agreed-upon compensation. Leases
have a fixed term (duration), and lessees usually make payments on a
monthly basis.
Two most common Types of Leases
- Operating Lease
- Finance Lease
ACQUISITION
When a company’s owners have something more in mind than starting or
growing their businesses, they want to cash out and to have the opportunity to enjoy the
fruits of their labors.
Investment Banks
Investment bankers serve as catalysts for almost all the major financial
transactions around the world. Although every now and then corporations attempt to tap
the capital markets for equity and debt without an investment banker’s intervention,
issuers attempt to go public through self-underwriting (no law requires an issuer to use
an investment banker when registering with the SEC), and mergers take place without
investment banker advisors, those instances are extremely rare.
Mergers
A merger is a type of sale of one company to another in which the acquired
company disappears into the acquiring company. Mergers are a particularly popular exit
strategy for company owners, because they can raise substantial capital for owners and
other investors in the business.