Companies need funds to operate, and there are points where revenue generation simply will not meet the mark. Businesses that want to fund organic growth into new markets, products or facilities often require more funding than they can get through normal business operations. The capital-raising process can be used to achieve a variety of goals, such as financing mergers or acquisitions, strengthening the balance sheets, refinancing existing debt or providing liquidity to existing shareholders.
The best strategy for a capital raise depends on the company’s needs, whether it is proactive and growth-driven or reactive and aimed at helping the company overcome financial stress or restructuring. The type of capital raising chosen can affect ownership, control, governance and the future of the business. While capital raising is primarily a financial process, it’s a regulatory one, too. With this guide, companies will understand various options for raising capital and the strategies required to successfully execute a capital-raising plan.
What is Capital Raising?
Much akin to a school fundraiser seeking money to buy new technology, capital raising involves generating money to support a business’s objectives. The chief difference lies in the type of funding and how it is structured. Raising capital often requires an exchange of ownership stakes in the company, agreeing to future repayments or accepting investors’ economic rights.
Funding may come from internal capital sources, like retained earnings or sales of assets, or external capital sources like investors or lenders. Businesses may seek short-term funds for working capital, or long-term funding for startup capital or growth investments.
By raising capital in the form of loans or equity stakes, the process affects the company’s financial condition, financial risk profile, concentration of shareholder equity, credit ratings and investor perception. For public and private companies, capital raising often requires additional disclosures and other financial reporting to prove that the company is acting responsibly and meeting the terms of the funding. Transparency and documentation are key to ensuring compliance and improving investor confidence.
The Main Types of Capital Raising
When businesses consider their options for raising capital, they should evaluate the various types. For a going concern, capital raising usually includes raising equity capital, debt capital or some combination of the two. The right choice depends on the company, conditions related to raising debt or equity and opportunities to explore alternative funding approaches.
Equity Capital
Raising equity capital involves providing an equity stake in the company in exchange for funds. This approach is ideal for startups, companies with limited cash flow and high growth or businesses that want long-term capital and no repayment requirements. Companies should consider their options carefully, as the raising of many equity shares could dilute the value of the equity held by founders and current shareholders.
Businesses can raise equity financing whether they are public vs private companies. When companies issue public equity, those shares can be freely traded on the public markets, which makes them lower risk. Private equity shares are harder for investors to obtain and can be high-risk, so they generally go to an institutional investor with a higher net worth.
The shares provided in capital raising may be common stock or preferred stock. Preferred stock means that the investors get their dividends first, but the rates are usually capped and the shareholders typically do not get to vote on company matters. Common stock is lower in priority for dividend payments, but the rates are not capped and shareholders typically get one vote per share.
Debt Capital
For companies that are able to handle the cash flow implications of debt or who want to avoid diluting their equity, raising debt capital may be an appropriate choice. Debt capital describes common lending types for businesses, such as term loans, revolving credit, asset-backed financing, bonds and notes. Companies apply for the funding must agree to the terms of the lending, as they will be contractually obligated. Debt financing usually carries the following features:
Interest rates on the debt, which vary depending on the company’s credit rating and the state of the economy
Debt covenants that require the business to follow certain terms, such as a limitation on the amount of money borrowed within a set period of time
Maturity schedules that determine when and how the debt must be paid
Repayment priority in the event of a bankruptcy or liquidation, which outlines the order in which debts are paid
Since debts must be paid regardless of the company’s current financial condition, debt capital can affect cash flow and balance sheets. Businesses with stable revenue, regular cash generation and short-term funding needs may benefit from considering these options.
Hybrid and Alternative Capital
Some businesses look for alternative funding sources or capital markets that blend debt and equity capital. There are a wide range of options, such as:
Convertible Notes: Loans or other forms of debt capital that offer investors the opportunity to convert the note to equity
Mezzanine Financing: Debt capital that is structured as unsecured debt or preferred stock
Private Credit: Privately negotiated loans from a growing number of non-bank private lenders
Alternative capital-raising options have the benefit of providing more opportunities for businesses to negotiate a repayment strategy, time the dilution of equity shares, or create a bridge between separate funding rounds. These options tend to appeal more to private companies and mid-market firms.
Strategic Approaches to Capital Raising
Although companies may have access to multiple strategies in the implementation of the capital-raising effort, the right approach depends on the business plan and future goals. Common strategies include capital raising to provide:
Growth-driven capital for expansion and innovation
Acquisition-driven capital to support M&As
Recapitalization to shift the balance of debt and equity
Greater liquidity for restructuring or shareholder exits
Strategies vary based on the status of the business and its long-term objectives. Private companies that intend to stay private may be more selective about equity raising, while a business intending to go public may opt for a venture capitalist to help them get through the early stages of IPO funding.
The Capital-Raising Process: Step by Step
Effective strategies for raising capital involve a number of steps, including:
Assessing funding needs and financial readiness
Preparing financial modeling, forecasting and valuation
Selecting the capital type and structure
Preparing offering materials and disclosures
Executing outreach to target potential investors
Negotiating terms, pricing and governance rights
Going through the process of regulatory review and approval
Closing the capital raising and collecting funds
Completing post-transaction reporting and compliance obligations
The entire process may take months, depending on the amount of funding needed, the type of financing and whether multiple rounds are required.
Internal Stakeholders Involved in Capital Raising
Before making any decisions about capital raising, businesses must understand the internal stakeholders who share a role in decision-making. These parties may involve:
Executive leadership creating strategic direction for the capital formation
Board members providing oversight and approval
Finance teams handling forecasting, modeling and reporting
Legal teams creating contracts and regulatory filings
Investor relations teams managing necessary disclosures and other communications with investors
Data teams and IT maintaining secure access to critical information
In the ideal scenario, companies designate a point person for each part of the process, to ensure that every aspect receives appropriate direction and review. Effective outcomes may require cross-collaboration between teams to confirm timelines and avoid bottlenecks.
External Players in the Capital-Raising Ecosystem
Companies must consider the external parties who play a role in the way that funding is provided, as well as the requirements of the financing. These external parties may include:
Stakeholders in financial advising or investment banking responsible for structuring the deal
Legal advisors confirming that the financing plan meets regulatory compliance standards
Auditors verifying the accuracy of financial information
Contracts, restrictions and other input from the institutional investors, private equity, venture capital or lenders providing the funding
Regulators overseeing the disclosures and posting to exchanges
Each party must have opportunities to review contracts and disclosures as appropriate, to reduce delays or non-compliance.
Regulatory, Disclosure and Reporting Considerations
Capital raising often creates additional reporting considerations that the company must arrange to meet. For example, a business raising capital by selling private equities to accredited investors may need to file Form D, while public crowdfunding calls for Form C. Companies that are preparing to go public and using the capital raising as part of the early rounds of funding may need to file a complete registration statement. Businesses that want to avoid making a full registration statement for their capital raising often need to file exemptions, such as Form 1-A.
Regulatory filings can take weeks to prepare, and the SEC often takes several business days to review the filing before publishing it. Accuracy and speed are key to ensuring that the filing reaches a potential investor in a timely manner, with attention to keeping confidential information secure. Once the company has completed the capital raising, they may be obligated to file regular reports to the SEC, or to their lenders common SEC filings.
Common Challenges in Capital Raising
Although capital raising is widely accessible to many businesses, there are a number of obstacles to avoid, such as:
Volatile markets or poor timing that make it harder to effectively raise funds
Inconsistencies with data or version control that decrease transparency to investors and regulators
Misalignment of timelines and priorities across internal teams
Delays in regulatory approval or gaps in compliance
Breakdown in communication between the company and investors, which can hurt investor confidence
Businesses can reduce these problems by creating robust internal controls and collaboration that ensures accuracy and cohesion throughout the process. Proposed legislation like the INVEST Act may affect regulations, which highlights the importance of staying current on the latest guidelines.
How Technology Supports Capital-Raising Execution
To ensure a smooth process for capital raising, companies should use technology to streamline data management and improve the security of information shared between stakeholders. Use of technology like a virtual data room can provide the following advantages:
Real-time status updates for transaction processing and deadlines
Centralized document management for each transaction
Secure collaboration between the company, advisors and investors
Automated workflows to streamline filings and approvals
Creation of robust version controls and audit trails
Building the technological infrastructure for these responsibilities can simplify document preparation and speed the funding approval process.
Capital Raising as a Strategic Growth Lever
Capital raising can be an excellent way for companies to get off the ground, fund future growth, or tailor capital structure to an advantageous balance of debt and equity. As a strategic decision, organizations can use funding to help them get ahead or meet business objectives. To get these benefits, businesses must invest in the proper preparation, governance and transparency.
Capital raising often involves regulatory reporting, which requires companies to prove that they are following legal processes for the financing. Technology streamlines the process to ensure accuracy, security, transparent documentation for investors and timely reporting. Discipline in these processes is key to successful funding and greater opportunities in future rounds of capital raising.
