Companies can raise capital in a variety of ways, from debt and equity financing to crowdfunding and issuing shares. Retained earnings, debt capital, and equity capital are the three main sources of business financing. Debt financing requires borrowing money from a bank or other lender or issuing corporate bonds, with the full amount of the loan plus interest needing to be repaid. Equity capital is obtained by issuing new shares to shareholders in the market, either through common or preferred shares. Crowdfunding is a popular option for startups seeking funding, especially those developing new technologies.
This method involves offering shares or rewards and requesting donations or loans. Reward-based crowdfunding offers often promise individual funders a product, service, or other premium in exchange for their financial support. However, debt capital has a downside in the form of additional interest. Different strategies are available for raising capital depending on the stage of company growth. For established companies, offering shares or bonds is a practical option.
Younger companies may need to raise outside funding or capital to expand their businesses to new markets or locations. IPOs are often used for venture capital investors and other initial investors to reap their benefits and abandon the investment. Private companies can raise capital by offering shares to family and friends or by going public through an initial public offering (IPO). A company can also raise capital by selling additional shares if taking on more debt isn't financially feasible. Preferred shareholders have a greater right to company assets than common shareholders, making their risk lower.
