Capital acquisition is the process of obtaining money for business projects, operational expansion, new opportunities or other purposes. Most companies use some form of external financing for their operations. The two most common methods are debt and equity financing. A few tips for securing external capital is creating a financial strategy, developing financial business relationships, using business credit to the company’s advantage and following a specific allocation schedule for using capital.
A financial strategy is a specific plan for capital acquisition. Few companies operate without looking toward the future. Having a financial strategy in place allows business owners and managers to have an idea of the type of funding needed for specific projects. For example, the strategy will typically include listing the cost of capital for different financing types. While small businesses only have access to the owner’s personal funds or bank loans, large organizations and publicly held companies can issue bonds or stock and seek direct investment in addition to bank loans. Each financing type will usually have a different cost of capital, which is the interest paid on the external funds.
Developing banking and other financial relationships in the business environment can help companies during the capital acquisition process. Having a personal relationship with bankers or lenders can help owners and managers work with individuals during the loan process. A close relationship — used properly — can help companies receive favor if the company is not necessarily in good financial standing. When issuing bonds or stock, a good relationship with a broker can also help, as the brokerage house is responsible for finding buyers and ensuring the company earns the funds needed for its project or opportunity.
Business credit is often necessary when obtaining a bank loan. Small businesses often use the owner’s personal credit when obtaining funds. Have poor or no credit can hamper the company’s capital acquisition ability, as most banks and lenders have strict requirements when loaning funds. To increase credit worthiness, companies can engage in trade credit relationships and use these accounts for references.
Capital acquisition may also require a company to provide the bank or lender with a withdrawal schedule. This schedule shows how the company plans to use funds acquired and the length of time the company expects to use the capital. External funds can be short, medium, or long term in length, depending on the purpose of the loan. In order to hedge the loan process, banks and lenders may only give funds in draws. Companies must use each draw effectively to grow the company without increasing the risk for banks and lenders.