How Do Companies Raise Money?

If you’ve been to a site like Seek Capital, you may feel overwhelmed by the amount of fundraising options. And it’s true that most of these fundraising options offer their own unique advantages and disadvantages. Fortunately, it doesn’t need to be as complicated as it seems on the surface. While the smaller details may change, there are really only three ways to raise capital for a company.

Borrowing

The disadvantage of borrowing money is obviously that you need to pay it back. The advantage is that you aren’t beholden to anything but the necessity of paying back the loan. If you prefer a more hands-on approach to your business, borrowing can provide a reliable option. That said, the impetus is entirely on you, and it’s not going to come with the sort of resources and support that equity alternatives can offer you.

There are a lot of options available for borrowing. The terms that banks offer can vary wildly, so smart business owners will shop around before seeking out a loan approved by a financial institution. Banks aren’t your only opportunity for getting loan-based financing too. More and more businesses are relying on peer to peer options. Whether these take the form of a self-driven crowdfunding platform or a more guided experience that makes use of a third party to help connect you with prospective loan providers.

Equity Capital

The advantage of a loan is that you retain a lot of flexibility to do what you want with your business without having to worry about anyone intruding on your daily operations. The disadvantage is that you’re limited in resources. A bank or peer to peer loan provider aren’t invested in the success of your business. They’re merely invested in receiving your money.

Equity capital typically requires a more cooperative approach to business decisions, but it also offers you a wealth of resources you’d otherwise not have. Angel investors are typically well positioned to provide business owners with some capital, while business incubators are more laser focused on ensuring a company’s success. When you’re giving out equity capital, your level of success impacts the income of shareholders. This can be a positive and cooperative experience, but it can also lead to tension from butting heads. Finding the right equity investors is important for long-term harmony, and equity as a whole offers a deep bench of resources and advice you wouldn’t otherwise get.

Business Profits

If all of your money comes from investors or loans, that’s not a promising sign for your business. The only way your company is going to stay profitable in the long term is by continuing to make money. And while that may be obvious, it’s something you need to keep in mind when trying to raise money for your business. 

How much can equity or loans help improve the operations of your business, how long will it take, and is it worth the investment? Evaluate the new services or features that equity or a loan will offer you, and look at it in the context of your business. If it’s not ultimately going to improve your profits or it can’t be sustainably paid for in the long term, you need to be focusing your attention on your profits rather than external financial sources.

There is no singular best option for how companies raise money. Instead, there’s a whole ecosystem of options that are tailored to the unique needs of different businesses at different points in time. If you really want to succeed in business, you should carefully examine all of your options and take a balanced approach to raising money.