AWays to raise capital

IPO

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Ways to raise capital for the company including pros and cons of each

There are three basic ways for businesses to generate funds, typically. These methods include getting funded by a bank or lending institution, from net earnings, and issuing equity capital. However, even though these methods are effective, they come with their fair share of drawbacks (Dean et al 2020). Businesses should consider each method before deciding which one to use.

1) Getting Funding from a Bank or Lending Institution: There are many benefits of getting a loan. Most banks will grant loans for businesses that have been operational for more than two years and for companies that can show assets exceeding $500,000. They will also grant them to certain types of businesses with proven revenues and profits. However, it is important to keep in mind that very few banks and lending institutions will grant loans to businesses that have no operations or have never operated before.

Pros and Cons

The pros:

-They are cheaper than equity financing

-They provide the borrower with a good amount of working capital for his business.

-They usually come with low interest rates, but there is still an interest rate associated with the loan that you take out.

The cons:

-They usually come with high interest rates.

-Hooked on other assets such as real estate, a business owner will often be tempted to put the loan on the value of their assets, which is not a good idea.

-They are difficult to obtain and there are many hoops to jump through.

-The business owner is in charge of paying back the loan he has taken out, which means he is in charge of running the entire company unless he chooses to let others manage it for him.

2) Net Earnings: Prospective business owners and managers should know that net earnings are the types of revenues generated by a company after all general and administrative expenses are deducted. This is one of the primary ways for business owners to generate capital. It is important for business owners and managers to keep track of their net earnings so they can make adjustments in an effort to increase those earnings. For example, if a company’s net income is below $25,000 then this indicates that the business should focus on increasing its revenue. The same goes for companies with higher revenues.

Pros and Cons of Net Earnings

Pros

-The first benefit of net earnings is that it is a part of the company’s revenues.

-The second benefit is that this type of capital can be used in a variety of ways. Some owners will decide to use their net earnings to reinvest in the business, while others may choose to use it for themselves or do away with it completely.

-The third benefit is that it provides business owners and managers with the tools they need to make adjustments so they can increase their revenues, meaning they have control over what happens within their businesses.

-The fourth benefit is that it gives business owners and managers the opportunity to use their time better, which they will be able to do if they know what is going on in the company.

-The fifth benefit of net earnings is that it allows business owners and managers to make decisions about how their company should look like. They can make the decision to get a new inventory or invest in technology.

Cons

-The first con is that this type of financing does not come with a lot of collateral for the bank or lending institution, meaning they will not be willing to lend as much money as they would otherwise.

-The second con is that owners and managers are not able to take out a lot of money at once, which means they will have to be more patient than they would if they had taken out a loan.

-The third con is that it takes time for net earnings to be realized, meaning the owner or manager may have difficulty paying certain bills in the meantime.

3) Issuing Equity Capital: The issuance of equity capital is one of the most effective ways for businesses to obtain capital, especially when they are extremely cash strapped and cannot obtain other funding methods. In general, businesses that issue equity capital are able to raise up to 80% of the money they need by using it as a source of investment. In addition, if the business decides to sell around 20% of its stock at a discount, then the rest of the money can be reinvested in additional equipment or product development.

The pros and cons of issuing equity capital are:

Pros

-It is cost efficient and allows the business to get access to large amounts of cash for expansion or for other needs.

-The business does not have to continue paying back its loan, which means its owner can no longer be in charge of running the company.

-It allows the business owner to sell a portion of his company at a discount in order to reinvest most or all of his proceeds back into the company.

-It usually comes with more favorable terms.

Cons

-It is one of the most expensive forms of funding

-It is hard to get investors interested in investing in a certain company.

-The success of the company relies on whether or not a large amount of investors come forward and invest.

-If you lose your major investors, then you may have to find new ones, which can take a long time.

B) Why you should go public (IPO)?

IPO lets a company gain more exposure and recognition from current and future investors. If a company goes public, they have the potential to generate substantial returns for their stockholders. In the end, going public can be a very successful way to raise capital and further a company’s success. However, it is a complicated process that takes much time, energy and understanding to do correctly. For those who are interested in going public but lack the knowledge or experience necessary to make it work for them, there are many different legal advisors at their disposal (Ahmad-Zaluki et al 2022). The process of going public begins with the drafting of a document called a registration statement.

A registration statement must contain all kinds of information about the company getting ready to go public as well as its potential earnings statements. The SEC requires that these documents are shown to a large number of people in order to give them an opportunity to express any concerns they might have about the business. These people include investment firms, financial institutions, and their competitors. This can seem like a very risky move for a company but it is important for the company’s future success and those who are financing their IPO are looking for reassurance that the business has been thoroughly examined by professionals.

.C) The process of going IPO.

The steps a company must undertake to go public via an IPO process are as follows:

The company must first file a registration statement with the SEC. The company’s financial information is then audited to ensure its accurate and complete. The company must file a prospectus that provides details about the company, including its operations, leadership, business risks, and financial statements – in layperson’s terms. Once the company has filed everything correctly with SEC and printed its prospectus on paper, they can sell shares to investors. This is how companies go public via the IPO process (Hartana, 2019).

D) The pros and cons of IPO.

The IPO or Initial Public Offering is a type of Islamic financing where a company sells shares of its company to the public. It is an alternative option for business owners who would like to raise money for their business without going through banks or stock-brokers (Joo et al 2019). This process does not save on fees, but it offers higher returns on investments.

The pros of offering IPO are as follows:

1) In some cases, if there was no available path through banks and stock traders, then offering IPO may be your only option.

2) Despite higher expenses associated with offering IPO, many companies have found it ideal to use this process.

3) In some cases, there can be capital shortage in the business due to unexpected circumstances and the cost of doing the IPO may not be worth it.

4) In some cases, long-term investors can be attracted by IPO due to its potential for growth and return on investment.

The cons

1) Due to the nature of business cycles, some firms may have a hard time finding investors.

2) In some cases, the company’s stock price may fall after the IPO due to market fluctuations.

3) In many cases stocks of companies which went through IPO have not been successful.

4) The SEC requires that your company offer enough information about its performance and financial statements before it goes public in an IPO so investors can make a decision about buying or selling your stock.

E) The cost for the company to go public.

For an operating company, the process is a bit more difficult and costly. The company must first undergo a series of analyst teardowns, where they are examined to make sure they have the resources to handle going public. Next, the company must hire an investment banker, who pays for all the filing fees with both the U.S Securities and Exchange Commission (SEC) and with state regulators.

The bank also takes care of most of the legal work that needs to be done for an IPO, including structuring stock offerings into different classes that carry certain voting rights or privileges. Finally, they will draft roadshow presentations for potential investors on why the company is worth investing in (Aminudin, 2020). Once the company has sold a certain amount of stock to investors, they will then start preparing their financial statements.

Reference

Dean, E., Elardo, J., Green, M., Wilson, B., & Berger, S. (2020). How Businesses Raise Financial Capital. Principles of Economics: Scarcity and Social Provisioning (2nd Ed.).

Joo, M. H., Nishikawa, Y., & Dandapani, K. (2019). ICOs, the next generation of IPOs. Managerial Finance.

Ahmad-Zaluki, N. A., Badru, B. O., & Kaliappen, N. (2022). Roadmap to initial public offering (IPO): the case of UECSB. Emerald Emerging Markets Case Studies.

Hartana, H. (2019). Initial Public Offering (Ipo) Of Capital Market And Capital Market Companies In Indonesia. Ganesha Law Review, 1(1), 41-54.

Aminudin, M. S. (2020). Analysis of Competitive Strategies Cigarette Industry in Indonesia, Study of Go-Public Company in The Government Transition Period. Jurnal Aplikasi Manajemen dan Bisnis, 1(1), 1-14.