How do companies raise capital for business activities?

Generally, businesses need capital to run. There are several ways which businesses can raise their capital for their business expansion plans: –

• Raise capital by issuing more new shares: in this case, company will have more new capital injected into the business through distributing new shares. The investors who inject the capital via buying the shares will become shareholders of the company. Mostly, they will have the voting right during the annual meeting and they might be distributed dividends when the company has excess profits.

• Raise capital by issuing preference shares: in this case, the investors who inject the capital will most likely be promised a certain percentage of return. The preference shares issued can be eventually converted to common shares, depending on the agreement between the company and the preference shareholders.

• Raise capital by issuing bond: in this case, the companies are borrowing money for the businesses through bond instrument. The investors will normally be promised a fixed return every year (say, 4% to 8% depending on the rating of the bond) until maturity. On maturity, the initial borrowed amount will be returned to the investors.

• Raise capital by taking loan: this is the most common method using by many SMEs. However, not all the loan will have attractive interest rate attached.

Generally speaking, the company has the lowest risk by raising fund via issuing new shares. This is because the company’s risk will be shared with the investors. The company does not need to return the money to the investors if the company does not make profit. The investors are also shareholders of the company. Hence, in view of the risks involved, the return of becoming the shareholders is higher if the company selection is done right.

The company will have the most risk with taking loan from the banks. Banks are secured creditors. Hence, when the company is insolvent, the company will first liquidate all its assets to pay off the loans before other preference shareholders and bondholders. The common shareholders will be the last who receive money. Bondholders shall have higher preference than preference shareholders on getting back the capital in the event of the company’s liquidation.

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