Capital Increase
A business idea is useless if there isn’t enough capital to make it a reality.
Capital increase is a method used by companies to raise their share capital, giving existing shareholders the right to subscribe to new shares in exchange for cash. Another possibility involves increasing capital through the exchange of assets, such as shares of another company, or by increasing the nominal value of existing shares. New investors have the opportunity to become shareholders. Also knwon as seasoned equity offering.
The ability of a person to obtain money/financial resources to start a business or assist in daily activities such as purchasing materials, paying wages, etc., is known as the capacity to raise capital.
What is a capital increase?
Why do you need to increase capital?
A business idea is useless if there isn’t enough capital to make it a reality. It’s almost impossible to start a business without money, but how do you get the money before the business is successful enough? Using your savings is an option, but usually, one falls short of money. Therefore, obtaining funds from other sources is important to finance all economic activities.
Choosing the right sources is the next crucial step in the process of raising capital, as it is, without a doubt, a critical factor for the success and growth of any business. To obtain funds from the most appropriate sources quickly and efficiently, exceptional capital raising skills are required.
Sources and Methods
The company can raise funds for various purposes, depending on the term, which ranges from very short to quite long. The total amount of the company’s financial needs depends on the type and size of the business.
The volume of funds raised depends on the sources from which they can be obtained. Individual businesses and partnerships have limited opportunities to raise capital. You can finance your company in the following ways:
- investing your own savings;
- borrowing from friends and family;
- arranging upfront payments from commercial banks;
- seeking loans from financial institutions.
Options for Raising Capital
Issuance of shares
This is the most important method. Shareholders’ liability is limited to the par value of the shares and is easily transferable. A private company cannot ask the public to subscribe to its capital stock and its shares cannot be freely transferred. However, in the case of corporations, there are no such restrictions. There are two types of shares:
- Equity shares – the number of dividends on these shares depends on the available profit and the decision of the directors. Therefore, there is no fixed fee for the company. Each share has one vote.
- Preferred stock – dividends on these shares are paid at a fixed rate and are only paid if there is a profit. Therefore, there is no mandatory payment for the company’s finances. These shares do not carry voting rights.
Commercial bank loans
Companies can obtain medium-term loans from commercial banks against pledged goods and assets. The funds required for modernization and asset renewal can be provided to banks on credit. This type of financing does not require any legal formalities, except for the creation of a mortgage on the assets.
Public warehouses
Companies often raise funds by inviting shareholders, employees and the public to contribute their savings to the company. Deposits from the public can be collected by companies to meet their medium to short-term financial needs.
Issuance of debentures
As a general rule, companies are entitled to borrow and lend by issuing bonds. The interest rate on the bonds is fixed at the time of issuance and is collected by pledging the company’s property or assets that guarantee the security required for payment. The company is obligated to pay interest even if it does not make any profit. Bonds are generally issued to finance long-term business needs and do not carry voting rights.
Reinvestment of profits
Profitable companies do not usually distribute all profits as dividends, but distribute a certain portion to reserves. This can be seen as a reinvestment of profits or a repatriation of profits. As these retained earnings are effectively owned by the company’s shareholders, they are recorded in shareholders’ equity. The retention of profits is a form of self-financing for the company.
Our approach
We work closely with our clients to develop a clear understanding of their strategic priorities. We then provide them with independent advice and direct support to achieve their goals through financing strategies at various stages of their business life, which may include venture capital, private equity, infrastructure financing and an initial public offering.
Contact our tax advisors in Barcelona by phone or email for professional advice and assistance in the capital raising process to avoid mistakes. If you have any questions about your specific needs, we are at your disposal.
