Different Ways Companies Raise Capital And How They Work

Every company needs working capital in order to thrive, and in order to obtain that capital, they need to be able to pitch themselves to investors or lenders. The process of raising capital usually depends on the business’s size and the kinds of resources it has at its disposal. Here are four of the most common ways businesses raise capital.

Debt Financing Through Loans

Business loans are usually the most common way businesses will raise capital through debt financing. Traditionally, these loans would be made almost exclusively by banks, but new non-bank online lenders are starting to rapidly take the place of banks due to more favorable terms and quicker funding that they offer. Usually most business loans are secured, meaning the lender will loan an amount based on the value of a business’s assets, and they’ll also have the right to liquidate those assets in the event the business defaults on the loan. There are a few business loans that don’t require collateral. But all loans will require interest payments which vary depending on the business’s credit, and the interest rates that the central bank is setting.

Debt Financing Through Bonds

Bonds are like loans because they’re borrowed money that must be repaid with interest, but instead of being a lump sum of cash that’s funded by a bank, they’re debt securities that investors buy in different amounts. Bonds are usually only issued by large corporations, and hence they are known as corporate bonds. The bonds will have a maturity date by which they must be paid in full. Corporate bonds have higher interest rates than government bonds, although the interest rates on bonds can also depend on how they are graded.

Equity Financing Through Venture Capital And Crowdfunding

Instead of getting a majority of their capital through debt financing, some businesses may prefer to get it through equity financing, which is otherwise known as selling shares of the ownership in the business. For smaller businesses or brand new startups, they might turn to family, friends or angel investors to raise the funding. Some may be able to obtain it from individual venture capital investors or entire venture capital firms depending on what kind of business they are. Others may turn to crowdfunding, a form of investing in which many people make small investments or donations to the business. Usually crowdfunding doesn’t involve giving all of those investors any ownership of the business, but they’ll usually get some perks for helping fund it.

Equity Financing Through IPOs

Once a business has become large enough and meets the regulations for public trading, they may decide to issue shares to investors through an initial public offering (IPO). This is the process that allows a company to be listed on a major stock exchange like the NYSE, and allows any investor with a brokerage account to buy their stock. An IPO can take a long time to accomplish and often needs the help of lawyers and CPAs to make sure it meets the appropriate regulations.

Those are the main ways most businesses raise capital, but they may also get it through other sources such as private equity firms or other investment banks. Firms such as EverBlu Capital have helped various businesses raise working capital through both debt and equity financing over the years.