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Whether the company is just starting up 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 be, for example:
- bank financing,
- attracting investors,
- support measures and financing programs,
- crowdfunding platforms and others.
Before approaching a bank or a foreign investor, it is important to establish a plan and think through which type of capital suits your company better. Factors such as amount of money needed, period, repayment schedule, willingness to sell share, provision of collateral etc. must be taken into account.
It is necessary to start the process of raising capital understand different types of capital peculiarities, to find the most suitable capital structure. We introduce three different funding strategies – selling share, borrowing and subsidies and their peculiarities. We'll also explain how Grow can help in the process. Let's begin!
Debt capital
Debt capital is the most easily understood form of capital – loan perhaps money from an external source, which the company uses to finance business operations. The company owes money to the lender and must pay it back later. Sources of debt capital can be, for example bank loan, bonds and crowdfunding.
Bank loan
In the case of a bank loan, the bank gives money to the company and the company promises to pay it back with interest later.
Short term the loan is useful for day-to-day operations such as deliveries, inventory management and salaries and is usually repaid within a year. Startups temporary financial problems are completely normal, and a short-term loan is a very good solution for them.
Long term A loan is often used to purchase business assets such as land, equipment or buildings. A long-term loan can take up to 10 years to repay.
The loan can be given both with and without collateral. With a guarantee the advantage of the loan is that their interest rates are often cheaper. Therefore, it is reasonable to investigate whether the company has vacant properties, i.e. real estate, equipment or means of transport that could be used as collateral. Guaranteeing is also a type of guarantee.
Bond
A bond is similar to a loan someone else's money that is paid back with interest. Bonds have an expiration date, and before that expires, the company must repay the bondholder loan with interest payment. A bond is generally more expensive than a bank loan, but it is more flexible in terms of other terms.
Advantages of debt capital
Unlike equity, where investors own shares in the company, with debt capital, you own the company sole proprietor. If the debt is paid, then there is responsibility for the company's activities to report finished.
If the company becomes very successful and makes colossal profits, it does not have to be shared with investors and the profits remain for in-house for use.
Disadvantages of debt capital
All company assets are at risk. If you get into trouble with your repayments, the borrower has the option to ask for your financing back guarantee on the face. Also the responsible person, or mostly the owner of the company wealth and prosperity is at risk in this case.
When taking a loan, it is worth considering the debts in advance effect to the company, for example, whether the company has enough finance repayments for. 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 to others pieces of the company's holdings. The main equity financiers 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. Generally, they invest when they realize that the startup has potential and the money they contribute will grow with the company. Angel investors are very popular among startups and start-ups to get capital to grow their business.
Venture capitalists are corporate investors who invest less often and with larger capital. Investments are made in already established companies, and venture capitalists take a more active role, which also means greater demands from them. At the same time, the company can gain valuable contacts and knowledge in the development of the company.
Advantages of Equity
Since shares of the company are sold instead of borrowing money, there is no capital repayment obligation. In addition, investors themselves have to consider the risk that the company may go bankrupt. At an early stage, it is usually easier to raise capital through the sale of a stake. With the help of investors, the company can also gather valuable knowledge, experience and contacts.
Deficiencies in equity
By splitting up pieces of your company, you are no longer the sole owner of the company. If the terms of ownership are not precisely defined, all business owners, both large and small, may expect different solutions to problems. With debt capital, such a problem cannot arise, because you retain all the ownership rights.
A company that is too small or with little potential will not catch the eye of investors, because investors are interested in ambitious companies with which it is possible to earn money. Only about 80% small businesses survive the first year, and after 5 years that number drops to 50%. Investors take this into account and weigh your decision thoroughly.
If investors refuse to support it can have quite an effect unmotivatingly. However, the refusal of one investor does not mean that it is necessarily a bad business idea, and it is worth trying other options for attracting capital.
Crowdfunding perhaps crowdfunding
Co-financing, which may be the case equity capital rather than debt capital, has become increasingly popular over the past decade. Crowdfunding is accumulation of money in small amounts both from companies and individuals. For this purpose, there are also various crowdfunding platforms on the Internet, such as, for example Funderbeam.
Loan-based crowdfunding in this case, persons who want to take a loan are brought together with those who are ready to give it. On an investment basis in financing, 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 is an opportunity for both investors and ordinary people to invest in smaller amounts and share in the company's success. Thanks to crowdfunding platforms, projects are supported directly without intermediaries or institutions.
Thanks to crowdfunding, they also get attention smaller projects, which can grow large and also give a novice entrepreneur better advantages for success.
Disadvantages of crowdfunding
If the company that raised capital through crowdfunding does not become successful or goes bankrupt, the investors will not get their invested money back either.
Since crowdfunding platforms often have a large number of different companies and projects, it is difficult for investors to find reliable and good investments, and companies difficult to stand out.
Grants
In order to revive the local economy supported by local governments, the state and European Union funds both startups and larger companies financially. That's what Estonia is for Business Development Foundation or EAS.
For example:
- EA start-up support for a beginner entrepreneur,
- Horizon 2020 grant for innovative and small and medium-sized companies with strong growth potential
- and many more.
In order to find out what kind of support your company could receive, you can ask for advice from a professional counseling center or EAS.
Benefits of grants
While there are no free lunches, subsidies are the closest thing to it for free money. When a company qualifies for a grant, it generally receives an amount that does not have to be repaid.
Disadvantages of grants
In order to receive support, the company must first to qualify. In general, there is an obligation to perform documents, to submit evidence and answer certain criteria. All these procedures can turn out to be extremely time consuming.
How do we at Grow Finance help you raise capital?
Funders value companies that can present reliable financial data. Business strategy and financing contribute to reliability goals, advantages and risks clear wording.
We can also help you think through different ways of raising capital and choose the one that meets the conditions of your company. We assist you in the capital raising process with the following activities:
- getting to know the company / financial situation / project (including defining bottlenecks, evaluating types of collateral),
- if necessary, an assessment of the company's value,
- defining the optimal capital structure,
- creating a list of capital sources,
- preparation of documents / business plan (including cash flow forecast, etc.),
- negotiation with third parties.
Read more about Grow raising capital about the service or contact us by phone: +372 5629 3090 or via e-mail: info@grow.ee.