There are many reasons for a small business to raise capital. Having the money to start a new business is an absolute necessity. Fund-raising can therefore be used to support the start-up of a business. But it can also be used to finance business growth. The capital invested will make it possible to bring projects to fruition and advance new development ideas. It's only later that the process can prove profitable. Find out more about raising capital in this article.
What does fund-raising involve?
Raising capital involves calling on investors who are not part of the company. The aim is to raise financial resources to start up a business, expand operations or launch a new project. Depending on the company's situation at the time of fund-raising, the latter can take different forms.
A distinction can be made between seed capital, which is invested at the company's inception, and development capital, which is invested with a view to growth. Fund-raising is particularly well-suited to small companies whose business plans show significant growth potential. The fund-raising procedure brings investors into the company's capital. They hold shares in the company and have full rights to attend shareholders' meetings.
Raising capital to finance business start-ups
Raising funds when starting up a small business enables you to finance the supplies you need to run your business. In the case of a boutique, it can be used to purchase the products to be sold, and therefore to build up the stock of goods. It's important to remember that a business spends money before it actually starts up. This advance has to be financed, and this is what fund-raising can be used for. This is particularly true if the company is starting out in a research and development phase. For example, developing a new product takes time and requires financial resources.
If the concept is interesting, it's easier to find investors and raise funds through private equity. Other alternatives exist, such as participatory financing or applying for grants. If the financial requirements are substantial, it is obviously possible to combine several sources. In particular, the company may need to develop marketing campaigns to raise its profile. Fund-raising can finance the implementation strategy.
Raising capital during the course of business
It's not just at start-up that a company needs funds. Capital can be essential for business development, or for reorientation based on a new project. For example, raising capital can enable an SME to strengthen its existing capital base, making it easier to obtain a loan from a bank.
Financial institutions appreciate it when borrowers are able to invest part of the sum required for their project from their own funds. When the sum available is insufficient, or jeopardizes the company's cash flow, raising capital can be an excellent solution. The company can then borrow a larger sum. Similarly, if the company relies on public subsidies, it must prove that it has sufficient equity.
By raising capital, the company retains considerable room for maneuver. It can finance its development or operating cycle, while retaining sufficient cash to meet receivables, pay suppliers and manage inventory. Business development may also require the hiring of new staff and the acquisition of equipment to support growth.
The main advantages of fundraising
There are several advantages to raising capital. The procedure is quicker than a loan. It allows the company to be reactive and gain in flexibility. The new activity can be launched without delay, and the risk of a competitor establishing itself in the niche is lower than if you had to wait for a bank decision or institutional subsidies. Raising funds through private equity or venture capital provides sufficient liquidity at short notice. The company can enter the market more quickly.
Another advantage is the advice investors can provide. These are usually experienced investors, known as business angels. In addition to providing funds, these business angels assist the company in its development. In a way, they act as mentors, ensuring that the funds are put to good use. The assistance provided is useful for start-up entrepreneurs, and often helps to improve decision-making in areas such as marketing, financial management or human resources management.