Capital Raising For Your Business
Times have certainly changed for businesses over the past few years and getting finance is no longer the simple process that it once was.
Especially during the recent GFC, anyone wanting to expand their business had a tough time convincing the banks to loosen the purse strings.
However, things are improving and some of you may have noticed that since the start of 2010 there appears to be mild optimism sweeping through financial circles. My sources within the banks tell me that credit policy is easing, however the proof is always in the pudding.
Over the next few months I will be exploring in this blog the different options that are available to owners wishing to raise finance for their business. But first, a quick reminder on capital raising in the past decade…
In order to function effectively, businesses need access to capital either by way of debt or through injection of equity. Both these sources dried up almost overnight as investors and financiers ran for cover after the meltdown that occurred mid 2008.
Much has already been written about the “noughties” – a decade of debt and excess. It all began in 2001- a global downturn caused by the dotcom bust and then of course we had “9/11”.
These events triggered a period of extraordinarily low interest rates promoted by the US Federal Reserve which was attempting to restore confidence.
As a result of all the cheap money available, many companies took on debt because at times it seemed easier than seeking equity from investors. After all, banks were literally falling over themselves to lend money. Competition became fierce and the risks taken only got higher.
In 2006, the warning signs flickered of what was to come in an overheated US housing market. But only when mass debt defaults snowballed in mid 2008 did global capital markets actually freeze for several weeks and the real financial meltdown began – the GFC.
After the collapse, debt suddenly became either very expensive or simply no longer available. Banks almost overnight rewrote their credit policies and procedures and began turning away business that they would have taken on only a few months earlier.
As a result of the absence of bank finance, many larger corporates embarked on aggressive capital raising exercises – either to reduce debt exposure or to maintain their existing capital expenditure plans.
Massive amounts of cash were raised through stockmarkets to retire what was now expensive debt and to recapitalise these businesses. Now of course capital is flowing more freely, but there is much distress still out there and lending remains cautious.
So what exactly is Capital Raising?
The most common use of this term is to describe fairly sophisticated methods of raising fresh equity or capital for a new or existing business. This fundraising process is usually done by engaging professional advisors and consultants who help the business prepare offer documents. These are then issued to potential investors who in turn make an investment.
The funds raised are then used by the company for a variety of reasons. However, a wider definition of the term might also be said to include any method of raising finance, whether it be through debt or by seeking investor finance as described above.
Any business currently wishing to either raise or borrow new capital will be expected to provide a high level of financial and background information. The boot is now on the other foot and since many businesses are chasing the same small pool of dollars, lenders and investors alike can pick and choose from a multitude of good businesses.
My next few blogs will explore some of the different options available for owners wishing to raise finance for their business. Some of the options will be traditional and well known to most of you, but others may not.
Keep in touch and feel free to tell me your thoughts, comments or perhaps even some of your own experiences. If you have a particular question I will dig around and get you an answer.
Until then….. Rob
Rob Kirkpatrick is a director of Vantage Financial – providing strategies and financial solutions to enhance your wealth and success.