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How does capital raising work?

How does capital raising work?

As an issuer in Australia, your main objective should be to grow your company and make it more profitable, and this involves raising capital to expand your current investment. Fortunately, the process of raising capital in Australia is no longer complicated, thanks to the growing number of sources of capital and the efforts being put in place by the Australian government to boost the country’s economy, including injecting more money into the capital markets.

But how does capital raising work? Your capital raising undertaking needs to be properly planned to succeed, which involves developing a well-thought-out capital raising strategy to guide your steps. In this article, we’ll dive into how the capital raising process works.

What Is Capital Raising?

The capital raising process involves raising funds from investors to support or expand your business. As an issuer, you may need to raise capital for several reasons, including funding your current venture, expanding your business operations, making an acquisition, transforming your current venture, or altering your capital structure.

To raise enough capital, you must approach existing or new investors and ask them to invest in your venture. Currently, there are three main types of capital: debt, equity, and hybrid capital. Debt capital is the amount of money given to you by an investor in the form of a loan, so you’ll be required to pay the loan with its interest over the agreed period.

Equity capital is the percentage of your equity that you give to an investor in exchange for funds, which means the investor owns a certain percentage of shares in the company. Aside from giving your financial support, the investor will also have a say on how to grow your business.

Hybrid capital is a combination of debt capital and equity capital. This means you can agree with your investor to convert the debt capital to equity capital in the future. One of the concerns shareholders have is: does capital raising affect the share price? The short answer is that the effect of a capital raising undertaking on the share price depends on what the capital raised is used for. For instance, if you use the funds to expand the business, the share price may increase in the long run.

How Does Capital Raising Work?

As mentioned above, capital raising requires proper planning, preparation, and execution. In most cases, the capital involved is in the millions of dollars. Committing such significant sums of money to a business proposition comes with understandable expectations. Therefore, return on investment is the top priority.

Raising capital is not like obtaining a bank loan. When you obtain a loan from a bank or other credit institution to grow or expand your business, you’re expected to repay the loan and its interest within the agreed period, regardless of your business' performance. You are also required to give collateral for the loan.

However, when you raise equity capital to boost your business, the person who gives you the money is considered an investor, and you give up a certain percentage of your equity to them. Therefore, the reimbursement of the funds and other resources given by the investor depends on the future success of your business.

The people who contribute to your capital raising campaign are commonly referred to as “angel investors” and are usually considered financially sound. So, they’ll help you meet the financial needs of your business–it’s also safe to say that they invest in your business at their own risk.

To avoid this risk, most investors will thoroughly scrutinise your business, checking its latest financial performances and forecasts, before they decide to invest in your venture. Therefore, the business plan that you present to potential investors must contain detailed information about the immediate and long-term benefits that your investors will gain.

You should periodically review your financial forecasts and make the necessary adjustments so that your investors can clearly picture the value of your business before they commit their funds to it. You also need to study your target investors to understand their expectations before you ask them to invest in your business.

With a reputable capital markets management system such as InvestorHub, you can have all the necessary data you need to develop a perfect capital raising strategy. If done properly, capital raising will help you grow your business effectively and in a financially prudent manner.

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