--- title: How to finance a business? date: 2023-01-02T08:46:27Z modified: 2024-05-28T10:07:09Z permalink: "https://grow.ee/kuidas-rahastada-ettevotet/" type: post status: publish excerpt: To raise capital, you need to understand the specifics of the types of capital in order to find the most suitable one. wpid: 7783 featured_image: "https://grow.ee/wp-content/uploads/2022/12/analyzing-g3bda3d241_1280-1.jpg" featured_image_alt: Business financing timestamp: 2024-05-28T10:07:09Z tags: - Raising capital - capital - raising capital - accounting service - financing --- ![Business financing](https://grow.ee/wp-content/uploads/2022/12/analyzing-g3bda3d241_1280-1.jpg) **Whether a company is just starting out or already medium-sized, capital is needed to grow. It is not always possible or economically reasonable to finance growth from the company's business activities and external financing options must be used.** **Sources of capital can include:** - bank financing, - investor involvement, - support measures and financing programs, - crowdfunding platforms and others. Before approaching a bank or external investor, it is important to set a plan and think about **which type of capital is best suited to your company**. Factors such as the amount of money needed, period, repayment schedule, willingness to sell a stake, providing collateral, etc. must be taken into account. To start the process of raising capital, it is necessary to **understand the **special features** of different types of capital** in order to find the most suitable capital structure. We will introduce three different financing strategies – **selling a stake, taking out a loan and grants** and their specificities. We will also explain how Grow can help in the process. **Let's get started!** ## **Debt capital** Debt capital is the easiest form of capital to understand – a **loan**, or **money from an external source**, that a company uses to finance its business. The company owes money to the lender and must repay it later. Sources of debt capital can include **bank loans, bonds** and **crowdfunding**. ## **Bank loan** **In the case of a bank loan, the bank provides money to the company and the company promises to repay it later with interest.** **Short-term** loans are useful for everyday operations, such as supplies, inventory management and salaries, and are usually repaid within a year. **For start-ups**, temporary cash problems are completely normal, and a short-term loan is a very good solution for them. **Long-term** loans are often used to purchase company assets, such as land, equipment or buildings. Long-term loans can take up to 10 years to repay. The loan can be granted with or without collateral. The advantage of a **secured** loan is that their interest rates are often **cheaper**. Therefore, it is wise to investigate whether the company has free assets, i.e. real estate, equipment or means of transport that could be used as collateral. A suretyship is also a type of collateral. ## **Bond** A bond is similar to a loan, i.e. **someone else's money that is repaid with interest**. Bonds have a set expiration date, and before it expires, the company must repay the bondholder **the loan with interest**. A bond is generally more expensive than a bank loan, but is more flexible in terms of other terms. ### **Advantages of debt capital** Unlike equity, where investors own shares of the company, using debt capital you are the **sole owner** of the company. Once the debt is paid, the responsibility for the company's activities **is** over. If a company becomes very successful and makes colossal profits, it does not have to be shared with investors and the profits remain for **internal use**. ### **Disadvantages of debt** **All the company's assets are at risk**. If you get into trouble with repayments, the borrower has the opportunity to ask for your financing back in the form of **collateral**. The **assets and well-being** of the person responsible, usually the company owner, are also at risk in this case. When taking out a loan, it is worth considering the **impact** of the debt on the company in advance, for example, whether the company has **sufficient finance for repayments**. It is also worth considering how costs can be reduced so that the loan amount is smaller. ## **Equity** With equity financing, the company raises money by selling **pieces of the company's shareholding to others.** The main financiers through equity are angel investors and venture capitalists (_venture capitalist_). **Angel investor** is a person who provides capital to a company and receives a share of the company in return. They generally invest when they understand that the startup has potential and that the money they invest will grow with the company. Angel investors are very popular among startups and start-ups to obtain capital to promote their business. **Venture capitalists** are corporate investors who invest less frequently and with larger capital. Investments are made in already established companies, and venture capitalists take a more active role, which also means greater demands on their part. At the same time, the company can gain valuable contacts and knowledge in developing the company. ### **Advantages of equity** Since shares of the company are sold instead of borrowing money, there is no obligation to repay the capital**. In addition, investors themselves must consider the risk that the company may go bankrupt. In the early stages, raising capital through the sale of a stake is usually easier. With the help of investors, the company can also gain valuable knowledge, experience and contacts. ### **Disadvantages of equity** When you divide your company into pieces, you are no longer the sole owner of the company. If the terms of ownership are not precisely defined, all owners of the company, large or small, can expect different solutions to **problems**. This problem cannot arise with debt capital, because all ownership rights remain with you. A company that is too small or has little potential will not catch the eye of investors, because investors are interested in ambitious companies that can **make money.** Approximately only 80% of small businesses survive the first year, and after 5 years this number drops to 50%. Investors take this into account and **consider** their decision thoroughly. If investors refuse to support, it can have a rather **demotivating** effect. However, the refusal of one investor does not necessarily mean that it is a bad business idea, and it is worth trying other options for raising capital. ## **Crowdfunding or _crowdfunding_** **Crowdfunding**, which can be both **equity and debt capital,** has become increasingly popular over the past decade. Crowdfunding is the **collection of small amounts of money** from both companies and individuals. There are various crowdfunding platforms on the Internet for this purpose, such as [Funderbeam](https://www.funderbeam.com/). **In the case of loan-based crowdfunding**, individuals who want to take out a loan are brought together with those who are willing to provide it. In **investment-based** funding, the applicant offers the opportunity to invest in the applicant's shares or other forms of equity through the crowdfunding platform. ### **Advantages of crowdfunding** Crowdfunding allows both investors and ordinary people to invest in **smaller amounts** and share in the success of the company. Thanks to crowdfunding platforms, projects are supported directly without intermediaries or institutions. Thanks to crowdfunding, **smaller projects** also get attention, which can grow into large ones and also give a novice entrepreneur better advantages for success. ### **Disadvantages of crowdfunding** If a company that has raised capital through crowdfunding does not become successful or even goes bankrupt, investors do not get their invested money back. Since crowdfunding platforms often have a lot of different companies and projects, it is difficult for investors to find reliable and good investments and for companies to **stand out.** ## **Grants** In order to stimulate the local economy, **local governments, the state and European Union funds** financially support both start-ups and larger companies. In Estonia, this is the [Enterprise Development Foundation](https://eas.ee/) or EAS. **For example**: - EAS [**start-up grant for a new entrepreneur**](https://www.rtk.ee/meede-alustava-ettevotja-startitoetus), - Horizon 2020 grant [**for innovative small and medium-sized enterprises with strong growth potential**](https://www.horisont2020.ee/struktuur/juhtposijion-toostuses/innovatsioon-vaike-ja-keskmise-suurusuge-ettevotetes-vke-des/) - and many more. To find out what kind of support your company could receive, you can ask for advice from professionals at the advisory center or EAS. ### **Benefits of grants** Although there are no free lunches, grants are the closest thing to **free money**. When qualifying for a grant, a company generally receives an amount that does not have to be repaid. ### **Disadvantages of grants** In order to receive a grant, a company must first **qualify** for it. In general, there is an obligation to complete **documents**, provide **evidence** and meet certain **criteria**. All of these procedures can be extremely **time-consuming**. ## **How do we at Grow Finance help you raise capital?** Funders value companies that can provide **reliable** financial data. A clear formulation of the business strategy and the **objectives**, **benefits** and **risks** of the financing contributes to credibility. We can also help you think through different ways of raising capital and choose one that meets your company's conditions. **We will assist you in the capital raising process with the following activities:** - getting to know the company / financial situation / project (including identifying bottlenecks, assessing types of collateral), - if necessary, assessing the value of the company, - determining the optimal capital structure, - creating a list of capital sources, - preparing documents / business plan (including cash flow forecast, etc.), - negotiating with third parties. 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