Let’s start out out with the basics explained. Capital funding is money provided by both lenders and equity holders to fund a business’s short-term or long-term needs. Capital funding includes stocks and bonds. The company uses this money for operating capital, and the bond and equity holders invest to earn returns in the form of interest, dividends, and stock appreciation.
Businesses require capital funding to generate more money over time. This includes company expansions, financial growth and acquisitions, and new products and services. Companies can secure capital funding in two ways: either secure funding through debt or by issuing stocks.
Capital Funding Basics: Equity Financing
When a company finances capital through equity, it has to issue stocks or take in a partner to the company. If the company is private, it might choose to go public with its shares through an IPO offering. However, issuing shares isn’t as easy as it sounds; for starters, the more shares a company issues, the more powerful shareholders become.
Powerful shareholders influence the company’s decision-making skills, and with time they pass decisions that could not align with the company’s initial core values. Most shareholders expect returns in terms of ROI, and capital gains and ROI is derived from company profits.
Additionally, equity financing makes companies more exposed to takeovers as competitors can gradually buy up most of the company shares and get significant power over the company’s operations. So while you aren’t legally obligated to pay back anything to your shareholders periodically, you do lose control over certain operations and decisions.
Issuing shares also needs to be done carefully; if a company ends up issuing too many shares at once, then it will end up diluting the value of its holdings and the company’s power to make internal decisions.
What Is Capital Funding? Sometimes, It’s Debt Financing
A much more complicated way to get capital funding is by opting for debt financing. When companies want to raise capital through debt, they can either secure funding from banks/ institutions or issue bonds. With bonds, shares will be reimbursed through coupon payments twice a year until the bond matures. The coupon payments are a fixed amount and permanent, so coupon holders don’t have any decision-making power in the company’s operations.
Some investors may also get discounts for purchasing bonds as they will be reimbursed when the bond matures. Bonds are recorded as a liability for the company, and these liabilities decrease as the debt is paid back.
In a debt capital financing system, creditors are given preference over shareholders; meaning that in the cased of company liquidation, creditors will be paid before shareholders. As a consequence, raising capital funds through debt will be more expensive than equity capital funding. The company will have to pay back its debts. It is also legally required to pay back its bondholders.
Why Is Capital Funding Important
Capital requirements are a significant barrier to entry for many people aspiring to start or expand a business. For example, a talented makeup artist might not have enough capital to launch their makeup line despite their visible demand. The process of obtaining a business loan is complex, and so is the process of obtaining a license; money is often the limiting factor preventing a business from opening. Many business ideas are never funded, and this is not necessarily due to a lack of trying. If a business idea seems too risky or if the applicant has a poor credit record, lenders and investors won’t provide funding.
Many small business owners believe that the most critical factor in success is sales, and a business might fail without sufficient sales. Even successful businesses face things like disruptions in cash flow caused by a fluctuation in sales revenue. A common mistake small business owners make is that they apply for capital funding when the need arises and not beforehand. This puts them on the spot and in an awkward and uncomfortable position because it might take some time to access capital funding, which will impact operations and prevent the business from taking advantage of new opportunities.
Capital funding can also cater to unexpected expenses like fires or accidents that cause a significant loss. Getting insurance to cover your losses can be a long process, and most business owners are not willing to wait that long.
How Successful Is Crowdfunding?
Crowdfunding is when the public pools in their money together to raise capital for your business. Having the right pitch and the right product is essential to get attention, and historically many companies have been able to fund their expansion through crowdfunding.
To get attention on crowdfunding platforms, you need to develop your pitch. Create it in a way that the people on Kickstarter or Indeigogo would want to know how you turned your idea into a reality. The biggest benefit of crowdfunding is that you can engage with numerous individuals and also practice and perfect your pitch the way people want to hear it.
While crowdfunding is an attractive option, very few businesses can secure funding through this route. According to recent statistics, around 70% of small business financing is secured through conventional business loans, credit cards, and lines of credit. The most popular site in the world for this is gofundme.
Is Venture Capital A Good Option For Companies?
Venture capital funding is a relatively new option for companies. This option is extensively used by companies that cannot gain capital funding through the debt or equity method. Venture capital funding specializes in high-risk operations; these companies invest if they believe that the entrepreneur’s knowledge and skill will lead to a successful ROI.
To attract venture capitalists, companies can either promise a cut in their future earnings or offer the venture capitalists shareholding in the company. Venture capitalists will then work with the company in detail and assist them through certain stages of the company’s development. Venture capitalists have a say in the company’s operations and the day-to-day running of the firm.
Venture capitalists are responsible for achieving a certain percentage of returns for the firm; therefore, they will work with the company personally. Most venture capitalists will only fund companies that prove that they have scalable returns and a positive cash flow. Venture capitalists also prefer companies that are slightly more mature.
Capital Funding For Your Small or Medium Business
While there are many forms of getting funding capital out there, sometimes your options are limited. It could be your credit, history, debt. Many banks create a lot of barriers and are not willing to take the risk. What makes an MCA different is it looks beyond the surface numbers that typically scare banks away buy looking at the current operations of the business. If you’re curious to learn more how MJ Capital Funding works, feel free to reach out anytime to speak to someone on the team! It may just be the solution your business is looking forward!