How to Raise Capital for Your Business: Useful Options and Strategies

How to Raise Capital for Your Business: Useful Options and Strategies

Raising capital is a crucial activity for many companies on the path to long-term stability and success.

While the specific objectives and context can vary greatly from one business to the next, the general goal is clear: Funding can support an organization as it seizes opportunities for development, growth and continued relevance in the future.

Before reviewing the methods to raise capital that organizations in the middle market space (companies with $30-$500 million in annual revenue) often use, it’s important to build a deeper understanding of common options for raising capital, which can help you make a more informed decision about the best path forward for your business.

Why all companies need to consider options for raising capital

You have to spend money to make money.

That phrase is well-worn, but it remains popular because it accurately speaks to a key fact of business operations: Many opportunities for a company to eventually earn a significant return require some form of investment to get started. That can include everything from opening a new production facility or retail location to investing in powerful new technology or acquiring a competitor or complementary business. In each instance, financial capital is required to take action.

Moving forward with a strategy that aims to limit risk and maximize rewards in such circumstances is simply in your organization’s best interest, and that’s true for new as well as mature companies.

Organizations with a long track record of consistent and stable operations may find it somewhat easier to secure funding than a new venture would. Financial institutions, not to mention private investors, may look more favorably on a business that has demonstrated continued competency and positive results.

In these cases, there is still plenty of due diligence to complete. Selecting the most relevant and effective option to raise capital for your business can mean an easier path forward, with less time spent worrying about repayment obligations and more time focusing on turning the investment into positive progress.

As your company prepares to raise capital, leadership and trusted employees should:

•       Develop an informative plan that describes how capital raised will lead to positive outcomes.

•       Create financial projections that a lender, investor or another contributor will likely want to closely review.

•       Identify the most effective options to fund the proposed diversification or development.

While the first two points of action will differ for every business, the third can be capably addressed by reviewing common options for securing funding, which are detailed in our next section.

Effective options to raise business capital

If your organization needs capital, it may have a variety of choices for securing a business loan or financing. It could use equity capital, which is raised by sharing ownership in exchange for payment, or debt capital, which provides funding in exchange for a promise of repayment with interest later on.

Some commonly used methods to secure funding include:

Corporate bonds

In simple terms, corporate bonds involve a few key actions:

•       The company seeking funding issues the bond.

•       Buyers pay the cost of the bond to the business, providing funding for current or future activity.

•       The organization makes interest payments to the bondholders, either at a fixed or variable rate (but generally on a set schedule).

•       After the last scheduled interest payment, at the bond’s maturity date, the company pays back the initial investment.

Corporate bonds are a type of debt capital. They create debt that must be repaid in installments but avoid sharing equity in the business with an investor or group of them. While the interest rate can vary, creating some uncertainty about the total amount owed to bondholders, it is possible to estimate these costs and create a business plan that accounts for them.

Bank loan

Bank loans, a type of debt capital, are frequently used for a variety of financial needs by businesses. That includes raising capital. In this arrangement, a business applies for a loan and, if approved, receives a lump sum payment from a financial institution. In return, the company pays both principal and interest over a previously agreed-upon timeframe until the debt is settled.

Bank loans, assuming approval, offer predictability and clear expectations. Middle market companies may find them easier to secure than startups and ventures with less robust revenue.

 

Syndicated debt

Syndicated debt, also referred to as a syndicated loan, is a specific type of bank loan. The unique quality that distinguishes syndicated debt is the participation of a group of lenders, as opposed to just one. This can be an effective process, among other options, if a standard loan doesn’t seem to address your needs.

A syndicated loan distributes the risk and commitment of funds presented by the loan across several providers. While a single bank may not have the risk tolerance to take on a loan or may not be able to dedicate a substantial portion of available funds to it, a group of investors can mitigate these risks.

Private placement

Private placement involves the sale of stock or corporate bonds to specific outside investors, instead of through a public market available to all. When stocks are used, this fundraising approach represents a form of equity capital. This strategy allows a business to raise funding from a carefully selected, pre-qualified group and carries fewer regulatory requirements than an initial public offering (IPO) does.

A partner that can support your business goals for raising capital

External funding and financing support continued success for companies aiming to grow and diversify. Determining the best method to secure this capital is vital for the best chance at success.

Comerica Bank can empower your business to raise the capital it needs to realize key objectives. Learn more about working with our experienced and knowledgeable business financing specialists.



This information is provided for general awareness purposes only and is not intended to be relied upon as legal or compliance advice.

This article is provided for informational purposes only. While the information contained within has been compiled from source[s] which are believed to be reliable and accurate, Comerica Bank does not guarantee its accuracy. Consequently, it should not be considered a comprehensive statement on any matter nor be relied upon as such.

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