Raising capital has proven to be a challenging factor when setting up a business, particularly in light of the prevailing economic adversities worldwide and the financial constraints individuals encounter in their daily lives. While many aspire to embark on entrepreneurial ventures or view business as a means of getting out of poverty, their biggest challenge is limited access to financial resources.
Even with minimal capital, you can definitely start up a business and become financially independent by implementing thorough planning and a good understanding of your target audience.
If you’re considering establishing a business and require insights into securing funding, this article will unveil steps on how to raise capital and the numerous types at your disposal. Relax and enjoy this meaningful read.
Meaning of Capital
According to Nic Barnhart, “capital is money that is used to make more money,” and anyone would agree that this definition comprehensively describes every aspect of the term ‘capital’ within the scope of business. An average person would define capital as the money an individual uses to begin a business.
Capital refers to the intangible assets owned by an individual, organization, or larger entity that can yield income. It comprises aggregated investments or ownership interests in tangible and intangible resources. Capital essentially encompasses anything that increases one’s ability to add value, whether it is financial value, physical value, or intellectual worth.
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To understand what capital is all about, let’s look at the difference between it and capital assets. While capital refers to the funds used to generate more wealth, capital assets are valuable possessions such as stocks, bonds, machinery, inventory, and other items owned by a business or individual.
With that said, capital is a fundamental necessity for every business. If you want to know how to raise capital, then you need to understand the three types that it is categorized into:
Types of Capital
1. Financial Capital
This represents a company’s financial capacity, in cash, credit, or other funding sources. It’s essentially the money that builds wealth creation and is the most prevalent form of capital. In the business world, financial capital typically falls into three primary categories: debt, equity, and working.
Debt capital is capital obtained through borrowing, with a duty to repay it and interest. In contrast, equity capital involves funding from investors, where profits are shared. Finally, working capital is the financial resources accessible to a company for addressing its immediate financial commitments and operational costs.
Usually, the formula to calculate working capital is: CURRENT ASSETS – CURRENT LIABILITIES
2. Human Capital
The notion behind human capital is that each employee’s abilities, expertise, and know-how are quantifiable and can boost productivity. As a result, an organization’s provision of education and training to its employees is regarded as an investment. Education, skills, experience, health, hard work, creativity, and innovation are the primary components of human capital. In brief, human capital means that people who work for a company are significant resources, not merely costs.
3. Natural Capital
Natural capital refers to natural resources on our planet; it is another term for the supply of renewable and non-renewable resources such as water, trees, natural gases, and other elements. These items do not require production or any artificial force to be created. Natural capital includes natural resource stocks, land, and ecosystems.
While this information may have provided a clearer understanding of the concept of capital and acquiring financial capital, there’s more to discover when it comes to sourcing capital. Keep reading to find practical methods for raising capital for your business.
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Practical Ways to Raise Capital for your Business
1. Fund it yourself
To answer your question of how to raise capital, this is usually the first and most practical way to raise capital for your startup, also known as self-funding. This involves using your existing resources or savings instead of immediately seeking external funding. It all boils down to self-investment. Your confidence in your start-up might attract the right investors.
While not everyone may have the opportunity to take this step for various reasons, alternatives still exist. The benefit of funding your business yourself is that you’re not dependent on external investors or lenders. This means that you don’t owe anyone if you incur losses, but if you generate profits, you keep the gains all to yourself. “Doesn’t that sound appealing?”
2. Solicit for funds from loved ones or social circle
Some individuals may be hesitant or unwilling to share their business ideas with loved ones; thus, they might avoid this method of obtaining finances. However, keep in mind that your close connections may be your first option because they may be inclined to invest in you financially or materially based on their personal relationship with you or their capacity.
Another way is by converting your social capital into financial capital. Your social capital is simply the value of your networks or relationships. After self-funding, your network of contacts should be your next choice for raising capital for your business. This is the approach employed by the Chinese tycoon Jack Ma to launch Alibaba, a global e-commerce corporation.
During a two-hour pitch in 1999, Jack Ma gathered 18 acquaintances at his residence and presented his business strategy and vision for the enterprise. On that day, he received a total of $60,000, launching Alibaba.
3. Find a partner
The typical African saying “two heads are better than one” also applies to business strategy, which is why most successful companies have two or more co-founders. For example, Hewlett–Packard (HP) was founded by Bill Hewlett and Dave Packard. Larry Page and Sergey Brin founded Google; Paul Allen and Bill Gates founded Microsoft; and many other thriving enterprises
So, if you have an idea, share it and seek a partner who shares your vision and has the financial capacity to bring it to life. This partner might even greatly enhance these ideas.
4. Grants and competitions
Occasionally, organizations, government bodies, or successful entrepreneurs organize pitch events to support upcoming entrepreneurs. If you encounter such opportunities, don’t delay; submit your application. If you don’t find these contests by chance, actively seek them out.
Alternatively, you can pursue grants, which are essentially non-repayable awards, often provided by donor entities like companies, foundations, or governments, to support businesses in achieving specific goals or encouraging certain achievements.
5. Take a loan
Now, this funding source method is generally considered a last resort. Ultimately, many start-ups avoid this particular option due to concerns about the probability of failure and the high interest rates when borrowing from an individual or organization. Note that starting or operating a business entails inherent risks, but a successful entrepreneur is determined by their willingness to tackle these challenges. While it may not appear enticing initially, skillfully managing these risks can lead to a great success story.
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Conclusion
Every business-oriented person needs capital, but taking the time to learn about how to raise capital is essential. We all want a great business story; however, evaluating your financial capacity and social capital first comes in handy. Even with funding, your readiness to embrace risks majorly shapes your business journey.
By keeping these practical approaches for raising capital in mind and strategically planning wisely, you’re on the path to becoming the next successful entrepreneur.
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