What Are The Pros and Cons of Raising Capital?

Raising capital is risky.  There is no question about that.  Before you raise capital, you need to decide whether you’re comfortable with the risks.  Here are the main ones:

  • Except for grants or gifts, all capital comes with strings attached. You will have to give up some form of control.
  • You will own less of your company in an equity capital raise and to get the same value for your business after raising equity, you need to create a more valuable business
  • Capital may come with restrictions as to how the business can operate going forward
  • You risk competitive sensitivity by opening up your business to other parties for diligence
  • A capital raise can be a distraction to you and your employees
  • Raising capital can be a long process
  • The wrong capital partner can harm your business

Here are the reasons many entrepreneurs, despite these risks, choose to raise capital each year:

  • Breathing room. When you’ve been operating on a shoestring budget at maximum capacity, it can be a huge stress reliever to have a cushion to execute your business plan
  • Capital helps accelerate your growth plan to create a larger business, faster
  • Capital enables you to access liquidity from your business
  • Capital can help you increase the value of your business and the dollars in your pocket when you ultimately exit
  • Capital will enable you to bring on more resources
  • The right investment partner can add immense strategic value to your business
  • A good investor can provide invaluable unbiased perspective
  • Capital can help you buy out existing shareholders
  • Distributions from the sale of a business are taxed at capital gains rate vs. ordinary income
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