As they get bigger, many corporations find that they have to raise more capital than what they have on hand in order to grow their business even further. The funds they raise can be used in a variety of ways, including acquiring new property or buildings, buying new equipment, investing in research and development, marketing their products or services, and expanding their workforce by hiring more people. There are several ways that corporations can raise capital; this article will cover the top five ways they do it. Read on to learn more!
1) Debt Financing
Debt financing is when a company raises money by borrowing, either through a bank loan or by issuing corporate bonds. This is a popular way for companies to raise money because it doesn’t require giving up any equity in the business. Plus, the interest payments on the debt can be used as a tax deduction. However, this method of raising capital does come with some risks, as the company is responsible for repaying the debt even if the business fails.
Raising capital through debt financing comes with some risk, though. If your business is unable to repay its loans, you could lose everything as well as your credibility. Therefore, it’s a good idea to secure a line of credit or corporate bonds instead of taking out large loans with just one bank. When borrowing money from multiple lenders, you have more flexibility in repayment and when interest payments are due. Plus, banks will be more likely to lend money because they’ll be diversified if your business has trouble paying back its loans.
2) Equity Financing
One way corporations raise capital is through equity financing, which is when management sells partial ownership of the company to investors in exchange for funding. This can be done through an initial public offering (IPO) or by selling shares to private investors. Equity financing can be a great way to raise large sums of money quickly, but it does come with some risks. For example, if the company doesn’t perform well, the value of the shares will go down and the investors could lose money.
In addition, selling shares can create a burden for management. Having investors often means more rules and regulations as well as more paperwork. The added work can end up taking time away from running your business. Selling equity can also reduce your flexibility and make it harder to do something like sell all or part of your company down the road if you find another investor or buyer who’s willing to pay you a higher price.
3) Preferred Stock
One way corporations raise capital is by issuing preferred stock. Preferred stock is a type of equity that has preference over common stock in terms of dividends and assets in the event of liquidation. Because preferred shareholders have a higher claim on the company’s assets, they typically receive higher dividends than common shareholders. However, preferred shares also typically have a lower voting rights than common shares.
There are several types of preferred stock, but they typically fall into two categories—convertible and non-convertible. Convertible preferred stock has an advantage over non-convertible because it offers investors greater flexibility. Investors can usually convert their preferred shares into common shares at a fixed price. However, some convertible preferred stock might have special features that limit their conversion features, including mandatory or optional redemption periods or change of control provisions. A company’s board of directors may choose to create and sell different types of preferred shares depending on factors such as market conditions and existing shareholders’ needs. Preferred stock is typically only available to large investors like banks and wealthy individuals.
4) Convertible Debt
Convertible debt is a type of debt that can be converted into equity. This means that if a company raises money through convertible debt, the investors may have the option to convert their investment into shares of stock. Convertible debt is often used by early-stage companies that are looking for funding but may not be able to offer traditional equity investments.
While it can be a powerful funding option, there are some risks involved with convertible debt. Because it’s considered equity in many respects, debt holders have certain protections that stockholders don’t enjoy. For example, if you were to file for bankruptcy as a corporation and convert your convertible debt into equity, you would receive higher priority than stockholders.
However, in exchange for these benefits there is a cost – interest rates on convertible debt tend to be much higher than other types of corporate loans. This means that if things don’t go as planned and your company doesn’t grow as fast as you thought it would, you could find yourself paying back more money than expected.
5) Initial Public Offering (IPO)
A corporation can raise capital by going public and selling shares in an Initial Public Offering (IPO). This is usually done when the company is first starting out, but can also be done later on down the road. An IPO allows a company to raise large amounts of money quickly, but it also comes with a lot of risks. The corporation will be subject to more regulations and will have to disclose a lot of financial information to the public.
If you decide that an IPO is right for your corporation, you can hire an investment bank or use a self-guided process (also known as a Friends and Family offering). With either option, you’ll need to create a detailed plan that lays out how much capital you want to raise, your expected total expenses and expenses during a given year, any other pertinent financial details and all of your background information. Once that’s complete, start looking for investors by going on road shows or meeting with key people in industries where your corporation will play. Have them sign non-disclosure agreements before giving them information about your company. Also make sure they meet any compliance standards set forth by your area’s securities regulator.