Starting a business today is one of the best investments you can make. It is very exciting to start a business in today’s economy, especially when you consider just how rapid the upcoming market growth will be. There are plenty of opportunities to seize, and the right business idea with a good business strategy will allow you to capitalize on the booming market.
That said, having a good business idea and a strategy to match isn’t enough. You also need to invest real resources in order to get the business off the ground. That process includes raising capital in order to fund business expansions. Fortunately, you can raise capital for your business venture using several means, and we are going to review how you can choose the right ones in this article.
Getting to Know the Weighted Average Cost of Capital (WACC)
Before we get to how you can fund your business, we need to take a closer look at the different sources of capital. There are several options to choose from, but the common ones are:
- Common stock
- Preferred stock
- Long-term loans
Depending on how you structure your company, some instruments can be better than others. That’s when the Weighted Average Cost of Capital (WACC) comes in. The WACC is a way of calculating the actual cost of capital, with each group of capital weighted proportionally. You can calculate the WACC here.
By adding weight to the calculation, business owners can decide the right fundraising option while keeping their long-term business strategy in check. There may be times when issuing new common shares is the best way to go, while long-term business loans may suit your business in other situations.
WACC also considers your corporate tax rate. The calculation is designed to help business owners identify the most cost-effective way of raising capital, so taking corporate tax into account is an important thing to do. It makes the WACC very reliable as a benchmark.
Know Your Market
Getting to know the cost of raising capital is one part of the equation. The other part of deciding which options to use is market understanding. In simple terms, you need to be able to identify whether you are gaining the most capital for the least amount of cost based on market situation and forecasts.
Let’s say you aim for 10x business growth over the next 5 years. Losing 10% of business ownership in order to issue new shares can be a viable option for raising capital. Investors are actively looking for new investment opportunities, especially in today’s market.
On the other hand, a lower growth rate that gets paired with healthier cash flow means you will be able to reduce your cost of capital by opting for loans instead. Low-interest business loans are easier to find considering how all financial institutions are competing in a saturated market.
An understanding of the market adds context to your WACC calculations. Rather than relying on a single point of view, you now have the ability to make the important decision with all the necessary factors considered. The result is an even lower cost of capital in the long run.
Timing is Everything
Last, but certainly not least, always take into account the timing of your fundraising. Understand when fundraising needs to happen. If you only need to give your business a short boost, raising capital may not be the right way of doing it. Instead, you can look at options such as bootstrapping and crowdfunding. These are more suitable for short-term cash flow needs. You still get the operating capital you need to grow the business without giving away ownership or dealing with long-term interest.
Depending on your business strategy, a timeframe of up to 1 to 2 years is usually considered short-term. If your business has the ability to repay loans within that timeframe, you may have more financing options worth considering and you won’t have to go straight to raising capital.
There are also angel investors to take into account. They are sole investors looking for innovative businesses with a bright future. The arrangement for an angel investment is rather different, but that investment will come with a relatively lower cost of capital.
Angel investors also provide you with more than an investment; they also mentor you as a business owner, grant you access to their business network, and assist you in maximizing your business growth potentials from the beginning.
The above is how you decide the best way to raise capital for your business venture. With the market ready for the next big thing, there is no better time to start a fundraising cycle than today.