A business cannot expect to grow if it does not have enough capital to fund its production activities and development projects. In the cutthroat world of business, most businesses struggle to get enough capital to fund their operational activities. In this article, I will highlight different ways to raise business capital that can help a business alleviate its financial difficulties.
Ways to raise business capital
One of the easiest (read trickiest) ways of getting capital for your business is through borrowing. Banks are in the business of lending money at a favorable interest rate and are therefore ready to advance credit to any able and willing business. However, while borrowing is easy, it may be a business’s ultimate undoing. The business must pay the loan with interest in a specified period. Given the uncertainties in the business environment, the risk of default is always high. If you default, you can easily be declared bankrupt and forced to close shop. On a different note, not every business has access to credit facilities. Only the businesses with a high credit rating are given loans by banks and other financial institutions. Bottom line, while debt is an easy way of getting capital for your business, it is a burden to the business. You need to think about it carefully before you decide to sign any loan agreement.
Equity is cheaper than debt, but it is more difficult to get. When using equity as a source of capital, you are inviting other people to be co-owners of the business. In other words, you are selling part of your stake in the business to them. This means that you will share your profits and losses with them. It is cheaper than debt because you have no obligations to share profits with shareholders. A business does not have to declare dividends to shareholders, but whenever it makes a loss, shareholders lose the value of their stake in the business.
Equity has its downside as well. For example, floating a company on a securities exchange is a very elaborate process. There are minimum requirements to be met. There are also bureaucratic legal procedures. The process may also not be economically feasible, especially if a company is overoptimistic. We have seen companies getting delisted from organized securities exchanges. We have also seen others experience an inelastic demand for their shares. Overall, equity is more affordable and manageable than debt as a source of capital, but it is harder to get.
Trade credit can also be viewed as a source of capital for business. Here, a business gets goods from its suppliers on credit and repays later, typically in 90 days. The business expects to sell these goods at a profit within this period so that it can meet its obligations when they fall due. Problems arise when this does not happen.