Regardless of your business size, raising capital is always challenging. Companies need money to cover operating activities and invest in future growth. Finding enough capital to meet your New York company’s needs takes a great deal of work, patience and help from other people. When companies raise capital, it typically falls under one of three categories.
When a business needs more cash than it has in the bank, debt capital often comes to mind as the easiest solution. Depending on the company size, raising debt capital can include loans from friends and family, a bank, personal loans, crowdfunding, angel investors, venture capitalists, other financial institutions or private equity funds.
Borrowed capital is expected to be repaid later on a pre-defined schedule, most likely with interest. The interest on debt typically costs less than other capital sources, but the company is at risk of default or bankruptcy if it cannot meet the payments.
Equity capital does not require repayment, but owners must give up a portion of the company in exchange for the influx of capital. An equity capital raise is the most expensive type because equity investors often expect to share in the firm’s profits. Exchanging equity for cash can also bring headaches as owners see their control diluted and deal with investors who may have different ideas about running the company.
Raising capital using a hybrid of debt and equity can offer a degree of financial security by allowing investors and the company to reap benefits from each. The pros and cons of using hybrid instruments to raise capital align with the pros and cons of a debt or equity capital raise. Hybrid instruments such as convertible debentures begin as loans and can be converted to stock. Preferred stock is a hybrid form of equity because it provides some protection similar to debt. Preferred shareholders receive dividend payouts before common shareholders, minimizing payment risk if the company has financial issues.
Companies need to raise capital to fund growth. Debt, equity and hybrid options exist, although each form has its own pros and cons. While not always easy, choosing the right capital type and investors can make the effort involved in your capital raise worthwhile.