Financial Tools for Business: How to Effectively Raise Capital

 

Introduction

In today's economy, capital attraction is a key factor for business development of any scale. Without sufficient financial infusions, companies find it difficult to implement strategic initiatives, introduce innovations, and expand their market presence. This is especially relevant during periods of active growth when internal funds are insufficient to implement ambitious plans.

Financial instruments serve as the mechanism that allows businesses to attract necessary capital, effectively manage available resources, and minimize risks. The choice of optimal instrument affects not only success in solving current tasks but also the long-term financial sustainability of the company.

In this article, we will examine the main financial instruments available to modern businesses: stocks, bonds, bank lending, leasing, as well as derivatives and alternative funding sources. Each of these instruments has its features, advantages, and risks, understanding which is critically important for making balanced financial decisions.

Part 1: Using Stocks and Bonds for Company Fundraising

Stocks as a Capital Attraction Instrument

What are stocks? Stocks are securities that certify ownership share in a company. By issuing stocks, a company sells part of its ownership to investors, receiving financial resources for business development in return.

The advantages of issuing stocks for businesses are numerous. First and foremost, it's the ability to attract a significant amount of capital without fixed obligations for its return. Unlike loans, the company is not obligated to return the funds received from stock sales, which reduces financial burden and bankruptcy risk. Additionally, public stock offerings increase brand recognition and trust in the company.

However, stock issuance comes with certain risks. The main one is dilution of existing owners' shares, which can lead to loss of control over the company. Public companies are also required to comply with strict reporting and information disclosure requirements, which increases administrative burden and costs.

Examples of successful IPOs can be found in different economic sectors. For instance, Ozon's stock market entry in 2020 allowed the company to attract $990 million, which significantly accelerated its development and expansion in the Russian e-commerce market. Another example is Saudi Aramco's IPO in 2019, which became the largest in history: the company attracted $25.6 billion by selling just 1.5% of its shares.

Bonds as a Debt Financing Instrument

What are bonds? Bonds are debt securities issued to attract borrowed capital. By acquiring a bond, an investor essentially provides a loan to the issuer for a certain period at a fixed or floating interest rate.

The difference between government and corporate bonds lies in the issuer and risk level. Government bonds are issued by governments and are considered one of the safest investments as they are guaranteed by the state. Corporate bonds are issued by companies and carry a higher default risk but usually offer higher returns.

The advantages of bonds for businesses include the ability to attract significant sums for a specific period without diluting shareholder equity. Unlike stocks, bonds do not give investors voting rights or management participation. Additionally, interest payments on bonds are usually counted as company expenses, which can reduce the taxable base.

However, bond issuance involves certain risks. The company is obligated to pay interest regardless of its financial position, which can become a serious problem during downturns. Furthermore, failure to meet bond obligations can lead to credit rating deterioration and reputational losses.

An example of successful bond use is the experience of Yandex, which in 2020 placed convertible bonds worth $1.25 billion with maturity in 2025. This allowed the company to attract substantial funds for investment in developing new business directions.

Part 2: Leasing, Lending, and Other Business Financing Instruments

Leasing as an Alternative Financing Method

What is leasing? Leasing is a form of long-term property rental with the possibility of subsequent purchase. The lessor acquires equipment or other assets needed by the company and transfers them for use for a certain period for an established fee.

The advantages of leasing are numerous. First, it allows businesses to use expensive equipment without significant one-time acquisition costs. Second, lease payments are counted as operating expenses and are fully deducted from the taxable base, providing substantial tax benefits. Additionally, leasing often includes maintenance and insurance of the property, which reduces additional costs for the business.

Leasing risks are associated with long-term financial obligations that the company must fulfill regardless of changes in the business environment. There may also be restrictions on the use and modification of leased property, which reduces business flexibility.

Leasing is most popular in industries requiring regular updates of expensive assets. These include transport companies (airplanes, trucks), manufacturing enterprises (machines, technological lines), medical institutions (diagnostic equipment), as well as commercial real estate.

Bank Lending

Why do loans remain a popular instrument? Despite the emergence of new financial instruments, bank lending maintains its positions thanks to accessibility, diversity of credit products, and established mechanisms of bank interaction with businesses.

The main types of business loans include working capital loans (for financing current operations), investment loans (for long-term projects), and targeted loans (for solving specific tasks, such as acquiring real estate or equipment). Additionally, banks offer credit lines, overdrafts, and other specialized products.

The advantages of lending lie in quick access to financial resources, maintaining full control over the business, and information confidentiality (unlike public securities placement). Loans are also characterized by flexibility in using the received funds and the possibility of building long-term relationships with the bank.

Lending risks include high debt servicing costs, the need to provide collateral, and strict requirements for the borrower's financial condition. Additionally, excessive debt burden can lead to liquidity problems and even bankruptcy if the economic situation deteriorates.

Other Financing Instruments

Venture financing represents capital attraction from specialized investors ready to invest in high-risk but potentially high-yield projects. This instrument is especially relevant for innovative startups and technology companies in early development stages.

Crowdfunding is a relatively new way of attracting capital based on collecting funds from multiple small investors through specialized online platforms. It can take the form of donations, product pre-orders, or investments in exchange for a company share.

The advantages and disadvantages of these methods vary. Venture financing allows attracting significant sums and receiving expert support from investors but requires transferring part of company control. Crowdfunding provides access to a wide audience and can serve as a marketing tool, however, it is often limited in the amount of funds attracted and requires significant efforts in project promotion.

Examples of successful use of alternative instruments are numerous. For instance, BlaBlaCar attracted several rounds of venture financing totaling more than $400 million, which allowed it to become a global leader in carpooling. In crowdfunding, a notable example is Pebble watches, whose developers collected $20.3 million through the Kickstarter platform, which far exceeded the initial goal of $500 thousand.

Part 3: Risk Management Using Derivatives

What are Derivatives?

Derivatives are financial instruments whose value depends on the value of the underlying asset (stocks, bonds, commodities, currencies, etc.). The main types of derivatives include:

• Futures — contracts for buying or selling an asset at a pre-established price on a certain future date.
• Options — contracts giving the right (but not the obligation) to buy or sell an asset at an established price within a certain time period.
• Swaps — agreements to exchange cash flows or other payments tied to various assets or indicators.

Using Derivatives in Risk Management

Hedging with derivatives allows companies to reduce risks associated with commodity price volatility, currency rate fluctuations, and interest rate changes. For example, airlines often use fuel futures to fix its cost and protect themselves from sharp price jumps.

Example: A manufacturing company importing raw materials from abroad can use currency forwards to fix the exchange rate for future payments. If the company knows it will need one million euros in three months to pay for a delivery, it can enter into a forward contract guaranteeing a certain conversion rate of rubles to euros regardless of market fluctuations.

Advantages and Risks of Derivatives

The main advantage of derivatives is the ability to minimize financial uncertainty and create a more stable environment for business planning. Companies can focus on their core activities without being distracted by managing market risks that are beyond their control.

The risks of using derivatives are related to their complexity and potential cost. Improper application of these instruments can lead to significant losses, as shown by the experience of many companies during the 2008 financial crisis. Effective use of derivatives requires specialists with high qualifications and a clear understanding of financial market mechanisms.

Part 4: Choosing Financial Instruments for Different Business Types

Different business types have their own characteristics that directly affect the choice of optimal financial instruments. Let's examine the specifics of capital attraction for small, medium, and large businesses.

Financial Instruments for Small Business

The specifics of small business lie in limited resources, lack of credit history for young companies, and often personalized management. For such companies, the most accessible instruments are:

• Microcredit and government support programs – relatively small loans at preferential interest rates, often with simplified requirements for borrowers.
• Equipment leasing – allows access to necessary assets without large initial investments.
• Factoring – selling accounts receivable to a specialized company, which provides quick access to working capital.
• Crowdfunding and P2P lending – attracting funds through specialized platforms from multiple small investors.

Application features: Small business owners should focus on instruments that do not require extensive financial reporting and complex legal procedures. When choosing credit products, it's important to pay attention to flexible repayment terms and absence of hidden commissions.

Financial Instruments for Medium Business

Medium businesses usually already have a stable financial history but often lack sufficient recognition to attract a wide range of investors. Optimal instruments include:

• Bank lending – both short-term and long-term, with the possibility of obtaining more favorable conditions due to a stable credit history.
• Private equity placement – attracting capital from a limited circle of qualified investors without public offering.
• Bond issuance in local markets – the ability to attract debt financing without needing to meet the requirements of major exchanges.
• Mezzanine financing – a hybrid instrument between debt and equity capital, allowing to attract funds for a longer term.

Application features: It's important for medium companies to create a diversified capital structure, combining various financing instruments. Building long-term relationships with financial partners and gradually creating a public credit history is particularly relevant for them.

Financial Instruments for Large Business

Large companies have maximum opportunities for choosing financial instruments thanks to their scale, recognition, and usually more stable financial position:

• Initial Public Offering (IPO) – access to extensive stock market capital with the possibility of attracting billions of dollars.
• Corporate bonds – issuing debt securities in international capital markets.
• Syndicated loans – loans provided by a group of banks, which allows attracting significant amounts while distributing risks among creditors.
• Complex derivative instruments – using advanced hedging strategies for protection against various market risks.
• Strategic partnerships and direct investments – attracting capital from other large corporations as part of strategic partnership.

Application features: Large companies need to pay special attention to the balance between equity and debt capital, as well as maintaining an optimal credit rating. They can afford to maintain specialized departments for financial risk management and investor relations.

Conclusion

In today's business environment, numerous financial instruments are available for capital attraction, each with its own features, advantages, and risks. Stocks allow attracting significant funds without obligation for their return but can lead to loss of control over the company. Bonds maintain the existing ownership structure but create debt burden. Bank loans provide quick access to money but require collateral and can be expensive. Leasing allows using expensive assets without acquiring them, and derivatives help manage market risks.

When choosing the optimal financial instrument, businesses should consider multiple factors: current financial position, company development stage, industry specifics, strategic goals, and readiness for information disclosure. As we found out, microcredit, leasing, and crowdfunding will be optimal for small businesses, medium companies can effectively use bank lending and private equity placement, while large corporations have access to the full spectrum of instruments, including IPOs and international bond loans. It's important to remember that there is no universal solution, and often the best result is achieved by combining various instruments.

Before using any financial instruments, it's critically important to conduct thorough planning and consult with financial experts. Capital attraction is not just a technical operation but a strategic decision that can determine the company's future for years ahead. Invest time in studying available options, analyze the experience of other companies, and make balanced decisions corresponding to your business's long-term goals.