A capital increase is a method used by companies to increase their share capital, which gives existing shareholders the right to subscribe for new shares in exchange for cash. Alternatively, capital can be raised by exchanging assets, such as shares in another company, or by increasing the par value of existing shares. New investors have the opportunity to become shareholders. Also known as seasoned equity offering.
A person's ability to get money/financial resources to start a business or to help in everyday activities such as buying materials, paying salaries, etc., is called the ability to raise capital.
Why do you need to increase capital?
A business idea is useless if you don't have enough capital to make it happen. It is almost impossible to start a business without money but how to get the money until the business is successful enough. Using your savings is one option, but you usually run out of money. Therefore, getting money from other sources is important for financing all economic activities.
Choosing the right sources is the next critical step in the process of raising capital, as it is without exception a crucial factor for the success and growth of any business. In order to obtain funds from the most appropriate sources quickly and efficiently, exceptional capital raising skills are required.
Sources and methods
The company may raise funds for various purposes, depending on the timing, which varies from very short to quite long. The total amount of financial needs of the company depends on the type and size of business. The amount of funds raised depends on the sources from which they can be obtained. Forms of sole proprietorship and partnerships have limited opportunities to raise capital. You can finance your company in the following ways:
- by investing your own savings;
- by borrowing from friends and family;
- arranging advance payments from commercial banks;
- borrowing from financial companies.
Options to raise capital:
Issue of Shares
This is the most important method. The liability of shareholders is limited to the nominal value of the shares and is also easily transferable. A private company cannot ask the public to subscribe to its share capital and its shares cannot be freely transferred. But for 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 discretion of the directors. Thus, there is no fixed fee for the company. Each share has one vote.
- Preference shares - dividends on these shares are paid at a fixed rate and are only paid if there is a profit. Thus, there is no mandatory payment for the company's finances. These shares do not carry voting rights.
Loans from Commercial Banks
Companies may obtain medium-term loans from commercial banks against the pledge of property and assets. Funds necessary for the modernization and renewal of assets may be provided to banks on credit. This type of financing does not require any legal formalities, except for the creation of a mortgage on assets.
Companies often raise funds by inviting their shareholders, employees and the public to contribute their savings to the company. Deposits from the public can be collected by companies to meet their mid to short-term financial needs.
Issue of Debentures
As a rule, companies have the right to borrow and lend by issuing bonds. The interest rate on bonds is fixed at the time of issuance and is collected by means of a pledge of the company's property or assets securing the necessary security for payment. The company is obliged to pay interest even if it does not make any profit. Usually, bonds are issued to finance long-term business needs and do not have voting rights.
Reinvestment of Profits
Profitable companies usually do not distribute all profits as dividends, but distribute a certain part of them to reserves. This can be seen as a reinvestment of profits or repatriation of profits. As this balance sheet profit is effectively held by the shareholders of the company, it is recorded in equity. Retaining the profit is a form of self-financing of the company.
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 in achieving 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 us by phone or email for professional advice and assistance in the capital raise process to avoid mistakes. If you have any questions regarding your specific needs, we are at your full disposal.