If only money poured like rain or grew on trees, raising capital would not be a problem. Any business owner will tell you that one of the biggest challenges they encounter is raising funds. The ideal situation is getting cash from profits, but sometimes this is not enough. Let’s delve into potential reasons mature businesses may need capital and how to raise it.
Why do businesses seek funding?
Small firms, whether startups or mature ones, obtain money for four main reasons: to start a business, acquire inventory, grow a business, and build up the company’s economic foundation. Companies adopt various modes of financing depending on their purpose. Small businesses’ financing options often land into two classifications: debt and equity. Other unconventional sources can also play a strategic role in satisfying a firm’s financial demands.
Most businesses, at some point in their existence, will eventually need to look for investors or more cash. When will that be for your business? Here is a checklist of when you may choose to raise capital.
- When an opportunity for growth presents itself
As an entrepreneur, you may have already encountered lots of people presenting business opportunities that promise you the sun and the moon. But once in a while, you will come across a real growth opportunity that you will not want to pass up.
It could be an opportunity to expand your reach, or open new branches, or develop new products. Whatever it is, study your next move carefully. Will the benefits of raising capital in this situation outweigh the risk? If your answer is yes, then move forward strategically.
- When you need a little more help to keep your business going
Some businesses struggle to keep afloat in the first year or two, or during a down-turn in the market. They may lose money for a while before becoming profitable. Some experts advise setting aside capital that will cover up to 6 months of operating costs. But sometimes this will not suffice. This is when a secondary investor or a bank loan can help tide you over until your business makes positive revenue.
- When you need a helping hand
Many savvy investors have a wealth of experience that they are willing to share with the world. This could even be more valuable to you than the money they may lend. Whether we admit it or not, we do not have all the answers to handle some problems within our business. An investor’s money, as well as their advice, may prove helpful along the way.
Common forms of capital
- Debt Capital
Businesses acquire debt capital intending to pay back the lender at a later time, normally with interest. This includes, but not limited to, personal loans, credit card debt, and bank loans.
- Equity Capital
Acquiring equity capital is brought about by a sale of a stock that is acquired from common or preferred shares. Equity capital is different from debt capital because you do not have to repay it. If you opt for equity capital, you are in effect selling a part of your company — called shares — to an investor. The investor will buy shares in the hopes of getting profit from them in the future.
How mature firms can raise capital
If you have a great product that you can pitch, then you can consider crowdfunding. One example here is the case of Formlabs. Formlabs is a company that manufactures affordable 3D printers. They were able to raise $3 million through crowdfunding. This allowed the company to expand its operations and to scale its manufacturing of low-cost printers.
With crowdfunding, you will be able to connect with people you would otherwise not have met who share your interests. You can also get helpful feedback about your product whether they are interested in investing or not. You will learn how to improve your product and how to present it better. And of course, crowdfunding can help you find that much-needed capital.
- Using profits
Mature firms can make use of their profits for expansion. Depending on your goals, you might be able to finance your venture by withdrawing money. The best thing about this is that you will not be owing anything to anyone.
- Apply for a loan
This is a very traditional way to raise capital. Still, it remains the most common method for most businesses to fund their ventures. The Small Business Administration reports that 75% of financing companies have leveraged funds from business loans, lines of credit, and credit cards.
To get approved, your business must be in operation for at least 2 years, have a good credit rating, and be generating income. Not all lenders are the same though, and some are stricter than others. If you get rejected by one, you can try another institution.
- Sell shares
You can raise money by selling shares of your company. Investors can buy these shares, giving them partial ownership of the company. As the business grows, these investors will be able to share in the profits.
- Issue bonds
Another way of raising capital among mature companies is by issuing bonds. A bond is a loan between a venture capitalist and a company. The VC provides the business with a precise amount of cash for an allotted period in exchange for reimbursement at periodic intervals.
As a business owner, you have plenty of options for getting funds for your business. If one option doesn’t work for you, you can move to the next one. Being persistent and resourceful is the key to success. And don’t forget to ask for help along the way. There are many platforms and businesses out there that specialize in aiding businesses to raise capital.