Raising Funds For Businesses Through Capital Market

In the country, apart from the known business challenges such as the decrepit infrastructure, inconsistent government policies, double taxation, regulation irregularities, lack of capital or funding issues contribute majorly to business failures.

According to findings of several surveys, one of the top challenges faced by entrepreneurs and businesses in Nigeria today is access to funding. Seemingly, funding is the bloodline of any form of business, whether it is a startup, nano, micro, small or medium-sized business, or an established large firm; knowing how to raise capital can often make the difference between business success and failure.

In fact, funding is important at all business stages, and cash which most times is referred to as ‘capital’ in business terms majorly dictates the pace of performance in any business. Simply put, capital is the energy source that all businesses need to operate, grow and mature into a strong, vibrant enterprise. Invariably, without funding or capital, it will be extremely difficult to get any enterprise off the ground.

For businesses to do well and prosper, they require stable source of long-term funds which is not available in the money market (the banking system). For instance, businesses need to expand their factories to remain competitive, and only a vibrant capital market can provide this type of long-term funding.

The capital market refers to the part of the market where the financial instructions mobilise the savings of the people and lend them long-term so that new capital can be raised in the country. The capital market can also be considered a marketplace where financial securities (stocks, bonds, and government-backed loans) are bought and sold.

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With companies using capital market to raise capital to boost their operations, an entrepreneurship and business management expert, Dr. Timi Olubiyi said: “In the light of the ever-increasing cost of bank borrowing, companies look at the direction of the Nigerian capital market as a viable option for companies with potentials to raise their much-needed finances.”

He added that, “just like other forms of capital raising options these grants and subsidies can be initiated for either short-term or long-term purposes. Equity capital involves exchanging a portion of the ownership of the business for financial investment in the business; most times it involves selling shares of the company in exchange for funding.

“Equity capital is raised when a business sells its shares to investors. The ownership stake resulting from this equity investment allows the investor to share in the company’s profits. Equity capital is usually a cheap form of funding and is an important source of capital on a long-term basis. However, sometimes it involves going public, getting listed on an Exchange, and also giving up partial or major control of the business,” he said.

He explained that, “on the other hand, debt capital is when a business borrows fund from individuals or institutions and agrees to pay them back later. Debt capital simply means loans and borrowings. The main consideration in debt capital is the ability of the business to generate sufficient returns to service the debt (interest and capital repayment).

“A typical mode of raising debt capital is through the bank loans. Banking institutions provide loans to individuals or businesses who approach them with a solid business plan, and good business structure with capacity for repayment. Bond is equally a debt instrument, and a way of raising debt capital as well. Without doubt, it belongs to debt capital categorisation because the authorised issuer (business) owes the bondholder debt and it depends on the terms of the bond issuance.”

Raising Funds From Capital Market

Debt Financing: Businesses can acquire capital through the assumption of debt. Debt refers to loans and other types of credit that must be repaid in the future, usually with interest. The most common types of debt capital that companies use are loans and bonds.

Equity Financing: Equity financing occurs in different forms. These are; private equity, public equity, and real estate equity. Private and public equity will usually be structured in the form of shares. Public equity capital raises occur when a company lists on public market exchange and receives equity capital from shareholders. Private equity is not raised in the public markets. Private equity usually comes from select investors or owner’s equity does not involve a direct obligation to repay the funds.