You are currently viewing Business Capital Structure And Fundraising

Business Capital Structure And Fundraising

Business Capital Structure And Fundraising Strategies 

How you structure your capital influences your business on different levels, including how you can raise more money for your business. Once you’ve determined your goals and the problems you want to prevent, you can establish your capital structure and seek funds to improve or expand your business. You can adjust your structure to best meet your needs as time passes.

What Is Capital?

Business capital is your assets, which are things with value. It’s necessary to create the products or services you sell to customers. Capital can mean: 

  • Cash and other assets (such as equipment, accounts receivable, equipment, buildings, and inventory)
  • Your business’ accumulated wealth or net worth. It’s your equity (or ownership) less your liabilities or debts
  • Your stock or ownership in your company

The term has different meanings depending on how you use it.

What Is Capital Structure?

As a lawyer, like a business partnership lawyer knows, a business’s capital structure is its mix of funding sources to operate and grow. It shows how your company finances its operations and investments by adding different capital forms. The two primary components are:

  • Equity: This represents business ownership. It can be funds contributed by owners (shareholders) and retained earnings. Equity holders can claim residual assets of your company if all debts and obligations are paid. This is often common and preferred stock.
  • Debt: Debt capital is borrowed money that must repaid over time. It can be bonds, loans, or other debt instruments. Debt holders are creditors who have a priority legal claim to repayment ahead of equity holders if your business liquidates

Your capital structure reflects balancing between equity and debt financing. Ideally, that balance will maximize capital value and minimize its cost. The equity and debt mix can vary on industry practice, risk, economic conditions, and financial goals. 

How Does Capital Structure Influence Your Fundraising Strategies?

It determines the mix of equity and debt you use to finance your growth and operations. The structure influences how you raise funds, capital costs, and financial risk levels. Here are some ways that capital structure affects fundraising strategies.

  1. Equity Financing. A company with a higher equity share generally relies more on equity financing. This is selling ownership shares (or stocks) to investors. The more equity sold, the more diluted existing ownership becomes, as new shareholders become partial owners. This approach reduces additional debt and interest payments. 
  2. Debt Financing. Companies with a higher debt proportion in their capital structure rely more on debt financing. This involves borrowing money and interest payments. This approach may amplify returns and losses. Higher debt levels increase the financial risk and can affect the company’s creditworthiness. Debt financing also comes with strings attached, such as covenants and terms. Failing to comply may result in financial penalties and other negative consequences.
  3. A Combination of the Two. Often, companies balance the two approaches. A balance of equity and debt allows you to adapt your fundraising strategy to market conditions, including interest rate changes or shifts in investor preferences.

As our friends from Focus Law LA can tell you, you should consult with an accountant and attorney experienced in helping businesses operate with the least cost and complexity before deciding how to structure your company’s capital, so schedule your appointment today.