How to Raise Equity Capital

“Money makes money." This is the mantra that all businessmen around the world follow while commencing a new business or growing their existing capital ventures. Although the idea of money multiplying itself sounds simple, the start-up capital required for this is difficult to collect. 

The reason behind success of an infant or emerging business is not just how much funding is raised but also the source of the funding which often determines business progress. 

Why the source of financing is stressed here is because there are various options available for raising capital but only a specific way of financing can prove to be feasible as per the specific nature and scale of the business.

There are two types of funding options which can be exploited; debt financing which involves borrowing money from banks or organizations and raising equity capital in which you sell a portion of the business ownership to others. 

The reason why debt financing is an attractive option for most people is because acquiring a loan for a business allows you to retain full ownership; you are not answerable to investors or shareholders who have a stake in your business. 

You have the ‘reins’ in your hands and apart from paying back the loan, interest and fee there is not a lot that needs to come out of your pocket. It’s undoubtedly a more affordable alternative to raising capital. 

However there is a downside to it as well, especially for small businesses which are unable to establish credibility in the market to arouse interest of banks, credit card companies and private corporations, in lending.

Small business owners turn to relatives, colleagues or friends who might be interested in investing capital to gain a certain percentage of interest on it. Convincing a third person about your abilities to make a business plan work is not an easy task. 

In the process of exhibiting your business in the market, owners get discouraged when they are unable to seek out investors willing to finance. However there are professional investors who can see the worth of your set-up and gauge whether or not it would be a profitable enterprise. 

These experts are called venture capitalists. Investors can be either passive or active depending on their extent of involvement in the running of the company or business. Active investors may pose a threat of conflicts due to their direct involvement in affairs of the company. 

Thus it’s important to consider how an agreement can be drafted with the investors which would be conducive to progress. Investors are usually entitled to a share of the total profit depending on the capital invested. 

Small businesses which are unable to acquire loans, usually seek this option as it’s mutually beneficial for all the stakeholders involved. Entrepreneurs sometimes dip into their savings and use their credit cards to fund their projects. 

A financial advisor needs to be consulted before making such a decision to minimize the long lasting effects it might have in case the business falls short.

Capital is often raised by inviting current or potential employees to invest. This ensures a dedicated workforce as employees have a direct stake in the success of the business. They often settle for lower wages in anticipation of the profit share they will receive at year end. 

Another sure shot way to raise money is by making the company public. This means that you are offering company shares which can be bought by others; making them shareholders who will receive a particular dividend on their shares. 

It’s risky and stressful as the owner loses autonomy and sole proprietorship of the business but it does have its advantages. Consulting a legal attorney before choosing the best method of raising capital is strongly advised as a lot of legalities are involved in getting listed as a public company. 

Risk management is also necessary. The pros and cons need to be thoroughly reviewed before embarking on an investment plan.

Potential entrepreneurs who are disadvantaged due to their race, color or gender often experience more difficulty raising capital for their ventures than others do. This disadvantage is due to the inherent achievement gap, which is based on socioeconomic factors like poverty and cultural attitudes which affect the level of achievement of minorities in the market (diversity in businesses on the rise, Reisinger) confidence, further pronouncing the wealth gap between the whites and minorities. 

For instance, Minorities (especially women) heading businesses generally tend to experience a higher degree of difficulty in raising equity for their respective businesses compared to white men. The reason for this is the lack of initial capital they have and the prejudice prevalent in society regarding the abilities and business acumen of women and minorities. 

Another reason for this is that venture capitalists often give money to businessmen they have ample knowledge about. There are greater chances of whites knowing other white businessman as compared to having information about a minority entrepreneur. 

The government, besides launching special loan programs for this category of businessmen, should concentrate on providing them with better equity investment opportunities. One solution to this problem is co-investment by churches, informal investors or community groups. 

Policy makers need to focus on this aspect of the money market to give an equal opportunity to minority entrepreneurs. However, the government is not the only places these changes will come from. 

In order to achieve dreams of starting their own business, in addition to trying to raise equity capital from others, people should also do it the good old fashioned way, which means cutting back their budget and saving over time.

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