Raising Capital for Companies

Just like public companies, private companies also require funding for its operations.  A large deal of capital funding is usually required during the startup and growth phases to address business expansion & ongoing operation needs. There are typically two main ways in which private companies can raise this capital: debt and equity. Some companies even use a combination of both.

Private Equity financing is done by selling shares of the private company stock for capital. These can be either common shares or preferred shares. Typically, equity investors rely on the stock to appreciate in value or the company to issue dividends for a return on their investment.

Debt financing occurs when the private company borrows money and agrees to pay it back to the lender at a later date. The most common types of debt capital used are bank loans and corporate bonds. Debt holders / investors usually earn an interest which the company is required to repay on the borrowed amount, at the end of the debt term.

Some private companies use a variety of equity-linked or debt-linked hybrid instruments as an alternative form of capital financing. An example is convertible bonds – a financing instrument where the private company borrows money as debt but agrees to issue equity (i.e. stock) in lieu of cash repayment of the debt capital, at a later date.

In recent times, it has become evident that private markets play a key role in most investor (institutional, professional, accredited and sophisticated) portfolios and this creates a vital source of equity and debt financing for all types of private companies.