Entrepreneur Guide: How to Raise Capital
As an entrepreneur, oftentimes knowing how to raise capital is one of your primary goals. The process of looking for fundings and investments can be both challenging and exciting. Read on to learn more about these challenges and how entrepreneurs can successfully raise capital.
How to raise capital is one of the most critical questions in the process of building a successful business. Most often, raising capital is the most difficult step. Furthermore, its result can make or break your business. Now, how do entrepreneurs access capital?
The first step that entrepreneurs need to accomplish is to know what financial capital is.
What is Financial Capital?
All types of businesses need capital to operate. However, most people think that capital is money, which is not necessarily true in all cases.
Capital can come in many forms, including personnel (human) and labor, economic, and, yes, financial capital. But even financial capital for entrepreneurs does not always mean cash. This type of business capital can be assets or securities.
Furthermore, having access to capital means being able to expand their business or get left behind by their competition. But how do entrepreneurs get funding? What options do they have?
How to Raise Capital?
Depending on which stage the business venture is, it will need different types of capital. From its early startup to expansion stages, how to raise capital is a constant question that an entrepreneur needs to answer.
For an entrepreneur, raising capital for their startups will be the main focus. How can a new small business that has not yet demonstrated the ability to earn profits collect enough funds? Luckily, startup owners have many options on how to raise capital.
Venture capital firms, angel investors, crowdfunding, and other funding firms look more into potential than profitability performance. They understand that startups and businesses are in the early stages.
And, that they need to raise funds to start marketing and selling their products or services. The video below discusses more on how to raise capital during the early stages.
Profit as Capital
When the business venture starts earning profits, entrepreneurs will have a new way on how to raise capital. Raising financial capital without depending on other parties is now possible. Business owners can reinvest a part of their profit for different ventures.
Entrepreneurs can set aside some profits for research and development, infrastructure, personnel, and expansion.
More commonly called debt financing, debt capital is a funding type when a company borrows money to finance its venture.
Entrepreneurs and small businesses can use loans or credit cards to finance expansion or new projects. They can approach their bank to take out a loan. In exchange for the loan, the bank charges the business with interest.
In contrast, larger companies and corporations issue bonds to investors. These bonds will mature in time, and companies pay interest to the investors.
Although debt financing is one of the fastest ways on how to raise capital, it has a downside. Debt financing’s most significant disadvantage is that it adds a burden to the borrower. Some banks may charge small businesses high-interest rates that their debt payments sometimes exceed their revenues.
On the other hand, equity capital is not about borrowing. Instead, entrepreneurs access capital through selling. So, businesses sell a part of their companies, referred to as shares. But not all company shares are equal. There are common and preferred shares.
Their difference is that common shares are the company stocks that give investors voting rights. However, these types of shares are not a priority compared to other shareholders.
This means that if the company goes bankrupt, owners of common shares will be the last to be paid off. On the other hand, preferred shares give investors limited ownership of the company.
Unlike debt capital, companies don’t have to repay shareholders for their investments. Instead, investors can get a return on their investments through dividends.
The value of the dividend depends on how the company performs. However, one of its major cons is that ownership of the business becomes more diluted.
How to Raise Capital for Entrepreneurs?
How to raise capital is not just a problem for entrepreneurs whose businesses are in the early stages. Even large companies and corporations are looking for ways to access more capital to fund their next ventures.
Hence, for entrepreneurs, it is crucial to understand what your companies need the most. Does your business need to improve its products or services? Do you need more personnel to keep up with the rising demand? Can your current profit fund your expansion?
By being prudent and answering these questions, you can also find ways on how to raise capital.
We at Full Scale are experts in providing support to entrepreneurs and their business ventures. We have the expertise to help you. Together, we can form your dream team of engineers, programmers, testers, project managers, and other experts to fulfill your goals.
Plus, serial entrepreneurs and Full Scale founders, Matt DeCoursey and Matt Watson are always willing to mentor fellow entrepreneurs. Their experience can provide you with helpful insights on how to scale up your business.