Introduction
Raising capital involves considerable risk. Business owners must know the risks associated with obtaining funds through a variety of methods and have realistic expectations of the rewards and pitfalls along the way.
Sources of Financing and Risks
Raising capital is one of the most important decisions a business owner makes, as it can determine the growth and success of the business. The primary sources of financing are internal and external. Internal finance involves retaining profits, while external sources of finance include venture capital (VC), debt finance, and angel/family/friends investment.
No matter what source of financing a business owner chooses, there are risks to be aware of. For equity financing, the major risk is dilution of ownership. Equity financing entails exchanging part of ownership for funding, which can be a risky decision for business owners.
For debt financing, the risk is default, which can mean expensive liquidations and foreclosures. Debt financing also carries the risk of higher interest rates if riskier investments are made.
Angel/family/friends investments carry the risk of losing personal relationships if the investment doesn’t pay off. Also, VCs can be less forgiving about such investments as they are professionally managed and expect returns on their investments.
Another risk to be aware of is fraud. Fraud can manifest itself in different forms, such as selling bogus securities, making false claims, or exaggerating the benefits of an investment. It is important to be aware of any potential fraudsters and have the necessary checks and balances in place to protect against such risks.
Lastly, businesses should also be aware of the legal risks associated with raising capital. Businesses must understand and comply with all relevant laws and regulations when raising funds.
Strategies to Mitigate Risks
One of the best strategies to mitigate the risks associated with obtaining funds is to diversify. Rather than relying solely on a single source of financing, businesses can diversify their investments by mixing different sources of funding and investments. This will help minimize the risk of default, fraud, and any other potential risks associated with obtaining funds.
Additionally, proper due diligence is key when considering any financial opportunities and investments. Businesses should research potential funders or investments to ensure that they are legitimate, manageable, and will meet the business’s financial goals.
Conclusion
Raising capital is an integral and risky part of growing a business. Business owners should be aware of the risks associated with obtaining funds and use strategies to mitigate those potential risks. Proper due diligence and diversification can be effective strategies to ensure that a business is making the best decisions possible when raising capital.
