Top smart and effective capital raising methods today

Capital raising is a critical challenge for many businesses when they need to expand operations, reinvest, or handle financial pressure. But what are the forms of capital raising, and which is the right choice for each stage of development? This article will help you understand the common methods, along with important considerations before implementation.

1. What is capital raising? When do businesses need to raise capital?

1.1. The concept of capital raising

Capital raising is the process by which an organization or business seeks funding, capital, or resources for specific financial goals. The main purpose of raising capital is to ensure that the business has sufficient financial resources to conduct business activities, expand, invest, pay off debt, and maintain daily operations.

Capital raising is the activity of generating capital for a business’s operations through various forms. Some common forms of capital raising for businesses today include:

• Raising equity capital from: Initial capital contributions, Retained earnings, Issuing shares.
• Raising debt capital from: Bank credit, Trade credit, Issuing bonds. 

1.2. When businesses need to raise capital

The timing for raising capital depends on the business’s goals, current financial situation, and development strategy. Capital raising is an important tool to ensure the growth and stability of a business in a changing business environment.

Newly established companies: Often need capital to start business operations. Raising capital for a startup can help with purchasing equipment, paying employee salaries, and building a foundation for business activities.

Business expansion: When a business wants to expand its operations, open new stores, or enter new markets, raising capital is necessary to meet the financial needs for this expansion.

Overcoming a financial crisis: In an emergency situation where a business faces a financial crisis or needs cash to overcome short-term financial difficulties, raising capital can be a way to maintain operations and resolve the financial issue.

Reinvesting in the business: When a business wants to reinvest in infrastructure, technology, or upgrade parts of the business to improve operational efficiency, raising capital may be necessary to carry out these reinvestment projects.

2. Current forms of capital raising for businesses

2.1. Raising initial capital contributions

Initial contributed capital is the capital that owners contribute when establishing a business; the nature and form of this capital source depend on its ownership type. Initial contributed capital is often used to start business operations, invest in fixed assets, and carry out necessary activities for the business. The amount of initial contributed capital can change depending on changes in owners or members.

Initial contributed capital is suitable for the following types of businesses:

• State-owned enterprises: Usually, this is investment capital from the State to establish and operate a public enterprise.
• Private enterprises: This is the investment capital of the private business owner, who self-registers the amount they want to invest in the business.
• Limited liability companies (LLCs) and partnerships: This is the total value of capital contributions from members or partners to the company.
• Joint-stock companies (JSCs): The initial contributed capital for a JSC is the total par value of all types of shares that have been subscribed for and are recorded in the company’s Charter.

Pros and cons of raising initial contributed capital in a business:

In summary, initial capital contribution is an important form of capital mobilization suitable for many types of businesses, and is especially appropriate for newly established companies or those with low owner’s equity. However, it requires careful management and profit distribution decisions to avoid conflicts and optimize financial performance.

2.2. Mobilizing Capital from Retained Earnings

Mobilizing capital from retained earnings is based on using part or all of the profits not distributed as dividends to reinvest in the business. Retained earnings are not paid out to shareholders in cash; instead, they are used to expand business operations or invest in new projects. Shareholders will not receive cash dividends but will increase their ownership in the business by acquiring additional shares from the reinvestment of retained earnings.

Capital from retained earnings is suitable for the following types of businesses:

• State-Owned Enterprises: In this case, the ability to reinvest retained earnings depends on the state’s reinvestment policy. State-owned enterprises may be encouraged to retain profits to invest in projects crucial for national development.
• Joint-Stock Companies: This form is applicable when a company decides not to distribute dividends and instead uses the profits to reinvest in the business, thereby increasing the company’s share capital.

Pros and cons of mobilizing capital from retained earnings in a business:

Raising capital from retained earnings is suitable for businesses that want to focus on reinvesting and expanding their business scale without paying dividends to shareholders. This can help improve growth opportunities and increase the company’s value in the future. Conversely, the business needs to consider the impact on the ownership of existing shareholders and the necessity of additional equity capital.

>> See more: What is Profit Margin? The most accurate way to calculate 3 types of profit margins

2.3. Raising Capital Through Bank Credit

Bank credit is an asset transaction between a business and a bank. The bank will provide an agreed-upon amount of money on the condition that the business will repay this amount plus accrued interest within a specified period. Currently, there are many forms of bank credit, such as one-time credit agreements, credit lines, revolving credit agreements, long-term investment loans, and more.

Raising capital through bank credit is suitable for all types of businesses. Depending on their financial needs and repayment capacity, businesses can use bank credit to meet their business objectives.

Advantages and disadvantages of this form of capital raising:

In summary, raising capital through bank credit is an important tool for many types of businesses to meet their financial needs and implement development projects. It is crucial to carefully manage debts and interest rates to avoid unnecessary financial risks.

2.4. Raising Capital Through Trade Credit

Trade credit is a type of credit agreement between businesses directly involved in production and commerce, in the form of buying and selling goods or services. This method is often used to promote international trade, reduce payment risks, and optimize cash flow within the supply chain.

Currently, there are three types of trade credit: export credit (granted to importers), import credit (granted to exporters), and broker credit (through a trade broker). Raising capital through trade credit is suitable for the following business models:

• Businesses with export or import activities: Trade credit is commonly used in international goods and services transactions, making it suitable for businesses operating in the export or import sectors.
• Businesses with trade relationships with domestic and foreign partners: Businesses that need to optimize payment and goods delivery processes can use trade credit to reduce risks and optimize financial management.

Advantages & disadvantages of raising capital through trade credit for businesses:

Raising capital through trade credit is suitable for businesses operating internationally that need to reduce payment risks and optimize their finances. Therefore, businesses need to manage their finances carefully and clearly understand the terms and conditions of trade credit to avoid unwanted risks.

>> Learn more: What is working capital? Formula and methods for managing working capital

2.5. Raising capital by issuing shares

According to Clause 2, Article 4 of the 2019 Law on Securities, to offer shares to the public, a business must comply with the conditions and regulations of the Law on Securities, including having a minimum charter capital, having profitable business operations, and having a plan for using the capital raised from the share issuance.

Raising capital by issuing shares is one of the key ways for a business to increase its capital or obtain new funding. This method is suitable for the following types of businesses:

• Joint Stock Companies: Issuing shares is a common way for joint stock companies to increase capital or obtain new funding. JSCs typically have multiple shareholders and can issue shares to attract capital from new shareholders.
• Startups: Startups can use share issuance to raise initial capital to develop products or expand business operations.

Pros & cons of this method:

2.6. Raising capital by issuing bonds

Corporate bonds are a type of security with a term of 01 year or more issued by a company. Bonds confirm the company’s obligation to repay the principal, interest, and other obligations (if any) to the bondholding investor. They are issued at specific interest rates and terms according to the special conditions of the company and the market.

Raising capital by issuing bonds is an important way for businesses to raise funds from investors by issuing debt securities. Corporate bonds are often issued by businesses in the form of Joint Stock Companies or Limited Liability Companies. These can be large corporations or medium-sized enterprises that need to raise capital for purposes such as expanding operations, investing in new projects, or repaying debt.

Advantages and disadvantages of issuing bonds:

In addition to the capital mobilization methods above, businesses can also apply many other ways to raise capital, such as borrowing from other individuals or organizations, using personal investment funds, financial leasing, crowdfunding, investment from sponsoring organizations, etc. Each of these capital mobilization methods has its own advantages and disadvantages, and the choice depends on the business objectives, current financial situation, and available resources of the company. Most importantly, leaders need to carefully consider and evaluate all forms to ensure the chosen method is suitable for their needs and avoids creating unnecessary financial burdens.

3. Legal risks when businesses raise capital

When raising capital, businesses will face many risks that need to be considered to avoid legal violations and potential unwanted legal consequences. Below are some legal risks to be aware of when raising capital:

Violation of securities regulations: If a business raises capital by issuing stocks or bonds, it must comply with the regulations and rights of the Securities Law and the regulations of the national Stock Exchange or other stock exchanges. Violations can lead to heavy fines and even the revocation of the issued securities.

Non-compliance with tax laws: Capital mobilization transactions can create tax issues, including personal income tax, corporate income tax, and value-added tax (VAT). Businesses need to ensure compliance with tax regulations and report taxes correctly.

Failure to consider ownership and protect intellectual property: In capital mobilization agreements, businesses need to consider their ownership rights and the protection of their intellectual property, especially when it involves issuing stocks or bonds with voting rights. Failure to protect these rights properly can lead to legal disputes later on.

Breach of contract with investors: When signing contracts with investors or business partners, businesses must ensure compliance with the terms and conditions of the contract to avoid legal consequences such as loss of passive income or lawsuits.

Violation of shareholder rights: Decisions related to capital mobilization can affect the rights and interests of shareholders. Businesses need to be careful not to violate the rights of existing shareholders and to comply with regulations regarding shareholders in corporate governance.

To avoid legal risks when raising capital, businesses should consult with experienced lawyers or legal experts. Businesses should also clarify the terms and conditions in contracts and implement strict measures to protect their rights.

>> See more: 4 Most Accurate Ways to Calculate Payback Period for Investors (Formula + Examples)

4. Considerations when raising capital for a business

Below are some considerations to ensure the capital raising process for a business goes smoothly and successfully:

1. Create a feasible and transparent financial plan with specific figures and clear objectives to build trust with financial partners.
2. Assess the ability to repay the principal and interest, if any, to ensure the business has sufficient revenue to make payments on time and avoid heavy debt.
3. Contract terms must be clear and detailed, including interest rates, duration, and clauses protecting the rights and interests of both parties.
4. Regularly monitor and anticipate potential risks during the capital raising process to identify measures to mitigate them.
5. Involve experienced financial experts or lawyers to help ensure the process is conducted accurately and in compliance with the law.

Raising capital is a crucial part of corporate financial management. By carrying out this process carefully, businesses can ensure they have sufficient capital to conduct business activities and achieve sustainable development in the future.

5. Comparison of traditional vs. modern capital mobilization methods

For a long time, businesses have relied on familiar capital channels to maintain operations and expand their business. These are forms with clear legal frameworks, commonly used by businesses of all sizes.

Traditional capital mobilization methods:

• Initial capital contribution: Shareholders and founding members contribute capital to form the business. This is a foundational, low-risk source of capital but is limited in scale.
• Bank credit: The business borrows capital from commercial banks, either secured or unsecured. The advantages are a large amount of capital and clear costs; the disadvantages are strict application requirements and the pressure of debt repayment.
• Trade credit: The business leverages relationships with suppliers (buy now, pay later). This is a short-term, flexible capital channel but is only suitable for trusted partnerships.
• Issuing stocks: The business lists shares to raise capital from the public. The advantages are a large scale and no pressure to pay interest; the disadvantage is a reduction in control.
• Issuing bonds: The business borrows capital from investors through bonds. This is a stable source of capital but comes with the pressure of periodic interest payments.

Alongside traditional methods, the development of digital technology and financial markets has created many new capital-raising methods, especially suitable for startups and fast-growing businesses.

Modern capital-raising methods:

• Crowdfunding: Businesses raise capital from many small investors through online platforms like Kickstarter, Fundstart. Advantages: reaches a wide community; disadvantages: depends on trust and marketing.
• Venture Capital Funding: Funds invest capital in exchange for equity. Suitable for startups with high growth potential, but may result in a loss of some control.
• Angel Investors: Individuals with financial resources and experience who invest directly in early-stage businesses. Advantages: provides both capital and experience; disadvantages: capital is more limited than from large funds.
• Capital Raising via Fintech and Blockchain: Raising capital through digital platforms, even by issuing tokens or using DeFi. This is a new, promising channel but carries high legal risks.

Comparison between traditional and modern methods:

• Stability: Traditional methods (banks, bonds) are safer and have a clear legal framework. Modern methods (crowdfunding, blockchain) are flexible but riskier and lack a complete legal framework.
• Scale of Capital: Traditional methods are suitable for large or established businesses. Modern methods are suitable for startups, SMEs, and innovative projects.
• Cost of Capital: Traditional methods often have a fixed cost of capital (interest rates, dividends). Modern methods may be cheaper initially but come at the cost of losing ownership/equity.
• Flexibility: Modern methods offer opportunities for quick and diverse access to capital, while traditional methods usually have stricter procedures.

Traditional capital raising provides stability and security, while modern methods open up opportunities for flexibility and innovation. Businesses should combine both, depending on their development stage, scale, and strategic goals, to build a sustainable and optimal financial foundation.

6. Factors affecting a business’s ability to raise capital

A business’s ability to raise capital depends not only on its capital needs but is also influenced by many internal factors and external contexts. Understanding these factors helps businesses proactively prepare and enhance their appeal to investors, banks, and financial partners.

Key factors affecting capital raising:

• Current Financial Capacity
  Transparent financial statements, stable profitability, and a reasonable debt ratio are the first criteria considered. A business with good ‘financial health’ will find it easier to access capital.
• Business Reputation and Brand
  A reputable brand trusted by the market will increase credibility with investors. Businesses with a history of bad debt or legal disputes will find it difficult to raise capital.
• Credit History
  Banks and financial institutions often base their decisions on payment history and the ability to meet financial obligations. A business with a good ‘track record’ will have an advantage.
• Industry and Market Outlook
  Growing industries (e.g., digital technology, renewable energy) typically attract capital more easily than declining ones. Investors also consider macroeconomic trends.
• Business Plan and Growth Model
  A clear business plan with specific goals and a roadmap will convince both banks and investors. Conversely, a vague plan will lower the chances of raising capital.
• Legal Framework and Support Policies
  Businesses in government-prioritized sectors (e.g., innovation, green – clean) will find it easier to access preferential capital than those in high-risk legal sectors.

7. Frequently Asked Questions

7.1 What criteria do banks use to approve a business loan?

Banks typically rely on several criteria to evaluate and approve a business loan, including:

• Financial capacity: The bank will review the business’s current financial situation to ensure it has the ability to repay the debt.
• Credit history: The credit history of the business and its owner will be reviewed to assess their reliability in repaying debts.
• Collateral: The bank may require assets from the business or its owner as collateral to secure their risk.

7.2 Should you use credit cards to raise capital for your business?

Interest rates on credit cards are often higher than other types of loans, which can lead to rapid debt accumulation and a financial burden for the business. Therefore, using credit cards to raise capital for a business should be considered a last resort if you cannot find capital through other means. It is suitable for short-term capital raising situations or short-term payments, and when the business has the ability to repay the debt within that period.

7.3 When should you issue bonds?

Issuing bonds is suitable for businesses that need long-term capital to invest in large projects or restructure existing debt. The decision to issue bonds needs to be carefully considered and requires financial and legal preparation. It must also comply with the regulations and conditions agreed upon with investors.

8. Conclusion

Above is all the information and legal regulations regarding forms of capital raising that businesses need to know. We hope that through this article, you have gained a better understanding of how to increase capital for your business. We wish your business success!