Capital raising is one of the easiest and most reliable ways to raise money to grow your business. Many companies in Australia raise capital to expand their operations, fund their daily running costs, grow their customer base, invest in research and development, or build infrastructure. If you are looking for funds to grow your investment, it’s a good idea to consider the capital raising route.
However, several pertinent questions about raising capital have been raised. For instance, many investors wonder: how does capital raising work? Others want to know if raising capital can affect the share price. These are legitimate concerns that you must address before you embark on raising capital for your business, and this article addresses this question: does capital raising affect share price?
Capital raising is the process through which businesses raise funds to support their operations. You can either raise capital as a start-up or as an established entity that looks to grow and expand its operations or products. There are many sources of capital for capital-raising companies in Australia; for instance, you can raise through venture capital, equity capital markets, or private offices.
There are three major types of capital that you can get from your investors: equity capital, debt capital, and hybrid capital. Equity capital is issued in shares: the investor offers you a specific amount of money, and in return, you give them a certain percentage of your equity. So, the investor becomes a shareholder, and funds raised through equity do not have to be repaid.
Of course, the debt capital comes in a loan that should be repaid with its interest within the agreed period. Hybrid capital is a combination of debt capital and equity capital. Therefore, you can agree with the investor who lends you money in the form of capital to convert the loan to equity in the future.
The main reason why companies raise capital is to create value for themselves and their investors by enhancing their operations and expanding their businesses. Therefore, you should only raise capital when you have a clear objective for it. If you are raising capital for productive purposes, be sure to employ it in ways that will make a profit.
This means you have to evaluate the investor demand for the type of capital they wish to give and have commitments from your shareholders–these things will help you determine the right price for each share before you make any offer to potential investors. Capital raising can also affect the share price when you raise additional equity capital, and this is commonly referred to as “dilution.”
Dilution occurs when new shares are issued, which raises the number of shares in your company. Consequently, the earnings per share will fall because earnings are usually spread over a bigger number of shares. If an existing shareholder doesn’t participate in the capital raising, their proportion of the company will remain low and of lower value. Giving new shares is not the same as buying back shares. A share buyback involves buying back your shares and cancelling them.
Fortunately, you can prevent your shareholders from becoming overly diluted by placing a limit on the amount of share capital that your ASX-listed company can raise through share placements to institutional investors. You can also provide your retail investors with the opportunity to engage in equity capital raisings without getting diluted unreasonably by offering them purchase plans, which come after share placements.
It’s also important to remember that dilution isn’t a major concern–the ultimate effect of capital raising on share price depends on what you intend to use the capital for. If you use the raised capital to expand your business and produce more products or services, the share price could go up in the long run, giving your shareholders more value.
Nevertheless, your shareholders might have to endure short-term pain from their diluted shares, but their endurance will eventually pay off, depending on the performance of your business. This is why it’s important to involve your shareholders in the entire process of raising capital, making sure they understand the type of capital you wish to raise, the reasons for raising it, and how you intend to use it. That way, nobody will blame you when their share price declines.
Finally, make sure you take advantage of the capital markets management system (CMMS) because it provides valuable insights and data that you can use to develop an effective capital raising strategy. With a reliable CMMS like InvestorHub, you’l triple your chances of getting the amount of capital you need when you need it.
What types of capital can a company raise, and how do they differ?
Companies can raise equity capital, where investors receive a share of the company, debt capital, which involves borrowing money that needs to be repaid with interest, and hybrid capital, which is a mix of debt and equity. Equity capital doesn't require repayment but dilutes ownership, debt capital incurs interest but doesn't affect ownership, and hybrid capital offers flexible financing options.
What is dilution, and how can it be managed?
Dilution occurs when new shares are issued, reducing the ownership percentage of existing shareholders. Companies can manage dilution by limiting the amount of new equity raised or offering existing shareholders rights to purchase new shares, maintaining their proportional ownership.
Why is shareholder communication important during capital raising?
Effective communication ensures shareholders understand the reason for raising capital, the types of capital being raised, and how it will be used. This transparency helps maintain trust and support, even if there's short-term share price volatility, by aligning shareholder expectations with the company's growth strategy.
How can a Capital Markets Management System (CMMS) benefit capital raising efforts?
A CMMS provides valuable insights and data to develop an effective capital raising strategy, helping companies understand investor demand and optimize their approach to raising funds. Utilizing a CMMS can increase the chances of successful capital raising by ensuring a more informed and strategic process.
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