3 Different Methods Of Raising Capital – Shark Tank Way

If you are a budding entrepreneur or are interested in knowing about businesses, you might be interested in knowing the different ways through which businesses raise capital. Any business needs to raise capital to expand, fund operations, invest in new projects, acquire smaller players within the industry, etc. Companies can adopt various methods of raising capital that best suits their needs in the right way possible.

Your favorite startups are probably also using these same methods to raise capital for running their businesses.

Different Methods of Raising Capital

Businesses can choose to raise capital through a certain method that suits their requirement. Majorly, businesses raise capital through:

• Equity Financing
• Debt Financing
• Internal Financing

Equity Financing

Equity financing is a way to raise capital by selling equity (ownership) in a business to investors. Below are various ways to do equity financing.

IPO (Initial Public Offering): Through IPO, a business raises capital by offering equity shares to investors through the stock market. This is also the first time that a company offers shares to the public and offers ownership in its business.

Pros	Cons
Can raise large capital	Lack of control
Increased public credibility	High regulatory costs

FPO (Follow-on Public Offering): This is the second time a company offers additional equity shares after the IPO. It is like a second round of fundraising from the public. It is often done by PSUs (Public Sector Undertakings) or firms needing capital for growth.

Pros	Cons
Good for expansion	More ownership dilution
Capital raise from existing market presence	Share price may decline

Private Capital: Private capital refers to money invested in companies that are not listed on the stock exchange. It usually comes from private investors, venture capitalists, and private equity firms. This involves raising capital through private investors in exchange for equity. Private equity firms take up a significant portion of the equity in exchange for a lump sum capital.

Pros	Cons
No public listing	Exit Pressure
Funding with strategic guidance	High-performance expectations

Venture Capital: It is a type of private capital usually provided by venture capital firms in exchange for equity ownership in the company. Businesses, usually start-ups, raise capital from venture capitalists (investors in early-stage or high-growth start-ups).

Pros	Cons
Ideal for early stage start ups	Difficult to secure
Gives access to networks and expertise	Influences major decisions

Angel Investor: An angel investor is a wealthy individual who invests their own money into early-age start-ups, usually when the startup is in its very initial days. Capital is raised in exchange for equity from high-net-worth individuals.

Pros	Cons
Funding with flexible terms	High equity dilution
Mentorship opportunity	Limited capital

Rights Issue: It involves offering existing shareholders additional shares but at a discounted price than the market. It’s a way for a company to raise capital without going to new investors. It keeps control within the existing shareholders.

Pros	Cons
Less expensive than IPO	Not always fully subscribed
Capital from existing shareholders	Can indicate financial weakness

Debt Financing

Businesses take debt from banks or other financial institutions at a given interest rate to meet their financial obligations. Ways of debt financing are mentioned below

Bank Loans: These are traditional loans from banks borrowed at a specific rate of interest, which the company has to return in the future through monthly installments (EMIs).

Pros	Cons
No equity dilution	Requires collateral
Structured repayment	Interest burden

Debenture and Bonds: They are long-term debt instruments issued to the public or institutions. These instruments are issued at a fixed interest rate that is paid by the company to the buyers of bonds. 

Pros	Cons
Flexible terms	Requires regulatory compliance
Tax benefits	Risk of default

Commercial Papers: These are short-term unsecured promissory notes, usually for working capital. It’s like an IOU issued by the company to investors, promising to pay back the money within the specified period.

Pros	Cons
No collateral required	Limited to short durations
Good for working capital	Only for financially strong companies

External Commercial Borrowings: These are loans from foreign institutions in foreign currency. It can be thought of as international borrowing.

Pros	Cons
Access to foreign capital	Requires RBI approval
Diversify funding sources	Exposed to currency risks

Internal Financing

It utilises the company’s resources to finance its needs. Internal financing happens through the following ways.

Retained Earnings: It is reinvesting profits from sales of goods/services rather than paying out dividends. It is a self-funded growth strategy. It is calculated as:

Retained Earnings = Net Profits – Dividends Paid

Pros	Cons
No capital cost	Limits dividend payouts
Shows business profitability	Slow capital accumulation

Pros:

• No capital cost
• Shows business profitability

Cons:

• Limits dividend payouts
• Slow capital accumulation

Asset Sales: It means selling of under or non-performing assets like land, machinery, etc., to generate cash that can be put to various uses by the company.

Pros	Cons
Unlocks cash from assets	Indicates liquidity issue
No impact on debt or equity	Reduction in long-term asset base

Pros:

• Unlocks cash from assets
• No impact on debt or equity

Cons:

• Indicates liquidity issue
• Reduction in long-term asset base

Depreciation Funds: It uses accumulated depreciation as an internal cash resource

Pros	Cons
No dilution of equity	Reduces net income
Supports replacement of worn-out assets	Limited to book value amounts

Equity Financing	Debt Financing	Internal Financing
New shareholders get a stake	No dilution of ownership	No ownership dilution
No repayment needed	Repayment along with interest	No repayment
High Cost of Capital	Moderate Cost of Capital	Low Cost of Capital
Shareholders may control decision making	Lenders have no say in decision making	No effect on control over decision making
Example: IPO, FPO, Private Equity	Example: Loans, Bonds, Debentures	Example: Funds from profits, sale of assets

Need for Raising Capital

Businesses raise capital for the following reasons

1. Expansion & Growth: Businesses raise capital to scale operations and expansion. They need it for hiring management, setting up new locations, and boosting production.
2. Working Capital Requirements: These include stuff like paying salaries, managing inventory, and handling vendor payments.
3. Investing in Technology & Innovation: To stay competitive, businesses need to invest in new technology, research, and development.
4. Debt Repayment: Paying previous debts or reducing long-term borrowing pressure is also done through raising capital.
5. Mergers & Acquisitions: Capital is also needed to make strategic acquisitions of smaller players.

Final Thoughts

Raising capital is an important aspect of running a business, whether large or small. Different methods of raising capital allow companies of different scales and sizes to meet their funding needs. Factors such as business need, ability to repay, and equity dilution should all be considered before a capital raise. If done in the right manner, raising capital can help businesses expand into new markets, set up factories, and pay off other debts to grow a business.

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