Raising capital for a business can be very tedious, but the source picked could have far-reaching effects. Thus, before settling on one, a firm’s management should assess the merits and limitations of each capital-raising method available to them. What criteria should guide this decision? We explore a few below:

1. Use of proceeds

An appropriate capital-raising method should match the urgency and amount of capital required. Businesses often raise working capital through short-term loans from lenders such as commercial banks. Venture capital firms also tend to gravitate towards companies with high turnover and cash generation potential. Patient capital, for example a long-term loan, is more suited to enterprises looking to fund acquisitions of income-generating assets. Equity investments through private placements and public offers are more convenient for facilitating existing shareholders to monetise their investment.

2. The cost of capital

Some of the usual costs of debt capital include interest rates, brokerage fees and origination fees. On the other hand, equity capital or shares may be accompanied by future dividend costs; dilution of ownership and reduced influence on decision-making. Ideally, an enterprise should earn a greater return on new capital to compensate for expenses incurred in obtaining the capital.

3. The stage of development of the business

Established businesses that are known to be profitable are likely to access a wide variety of financing sources. Such firms may choose to raise capital through initial public offers and rights issues. In contrast, start-ups may not enjoy the same privilege. They rely on funding from their proprietors’ savings, family, friends and angel investors. In addition to funding, angel investors add value to the business by providing technical expertise together with access and retention of relationships with clients, suppliers and other stakeholders.

4. The current financial position of the business

Businesses with high debt-to-equity ratios are unlikely to access more debt capital.  Such institutions are more likely to attract interest from private equity investors. These investors need convincing on a feasible path to debt repayment, possible dividend income stream and subsequent appreciation in the value of their equity stake in the business.

Having capable advisors to support a business significantly improves the chances of success of a capital-raising process. For over a quarter of a century, Standard Investment Bank has advised numerous organisations on various capital-raising transactions, whether debt, equity or a combination of debt and equity in form of private equity, private placements, initial public offerings (IPOs) or even public initial bond offerings (PIBOs), and in the process built a reputation of efficiency and effectiveness.

Contact us at advisory.sib.co.ke for a more tailored and comprehensive discussion on raising capital for your business.

Thomas Juma is a Corporate Finance Associate at Standard Investment Bank

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