Share Capital: Advantages and Disadvantages
As any business owner will tell you, raising enough money to support your goals can be tough. But if your vision is to succeed, finding a way to overcome this issue is essential. For some, the answer lies within their own business, or rather the equity it contains. Share capital offers you the means to raise capital by selling shares in your business to investors. Yet although this could be a useful path to take advantage of, you need to have a comprehensive insight into how it may affect your business. So in order to help you make an informed decision, understanding the advantages and disadvantages of share capital is vital.
Advantages of Share Capital
If you’re having to manage with a limited budget but are looking for a way to invest in the future of your business, exploring the advantages of share capital could be a step toward finding a solution.
One reason for why you may want to use share capital as opposed to borrowing capital from financial institutions is that the money you could receive from investors doesn’t require you to make regular repayments to an investor. As such, you’re not having to worry about keeping up with a monthly repayment scheme or paying interest.
Also, by raising funds through the use of share capital, you’re not bound by any usage restrictions or stipulations. As such, the money that you could receive from investors could be made to support anything from key growth projects, innovation, research and development or purchasing equipment to moving into new premises. Therefore, how the funds are used in your business is entirely up to you, though investors may still want to know what your plans are how you intend to make them happen.
In addition, using share capital also gives you total control of how much equity you’re giving away in your business, the price of each share and when they’re given. Should you require more money in the future, you can continue offering shares as well. What this means is that you’re not at liberty to give away more than what you’re comfortable with, and what you do sell is done at a price that still works for your goals.
Finally, another advantage of using share capital over traditional forms of lending is that it exposes your business to less risk. As well as not having to make regular monthly repayments or pay interest, you and your investors have a vested interest in seeing your business reach a prosperous future. So, if they have sufficient experience in your sector, investors may decide to offer you advice or even get involved in helping you make key decisions for your business. As such, share capital could become a gateway towards gaining access to the knowledge and expertise of seasoned industry professionals.
Disadvantages of share capital
Yet although share capital can be a useful tool for your business, there are other aspects that you need to consider as well. Firstly, by offering shares, you’re essentially giving away control of your business to a certain extent and putting it into the hands of your investors. As such, you need to be careful about how much of your business is sold, especially as investors will have the right to vote on aspects such as business deals, corporate policy and how the business operates. If you’ve given away too much and investors vote against your plans, you’ll lose control over where you’re business is headed and may not be able to seize key opportunities. In fact, if they have a majority, you also run the risk of being removed as the head of your own business and being replaced.
Plus, it’s also worth noting that investors expect a greater amount of return from their investment, mainly because of the amount of risk they’re exposed to should your business become bankrupt. As such, stock in your business is usually sold to investors but at a lower cost, enabling them to recover a portion of their investment. You also won't be able to deduct any dividends you’ve paid out.
Alternatives to share capital
Although offering shares in your business could be a useful means of raising capital, you also face the risk of losing some control over your business, which deters many business owners from venturing down this pathway. Nevertheless, there are other ways of supporting your business as it moves forward. As the Alternative Finance industry continues to grow in prominence, a new generation of business finance products and lenders are now entering the UK lending landscape and, therefore, empowering more and more business owners to gain access to the funds they need to invest in their future, regardless of their chosen sector. The only obstacle standing in your way is deciding which finance solution is the most suitable for your business’ goals.
Need help raising capital for your business?
At every stage in your business’ development, having access to a sufficient amount of capital to reach the next step in your journey is essential. As such, you might be tempted to give equity away in your own business to investors. However, this could come at the expense of reduced control over the direction your business takes. Instead, you might want to consider other options first. The Alternative Finance industry is giving UK businesses of all sizes and stages in development access to a wide range of business finance solutions that exist outside the domain of traditional financial institutions. All you need to do is source the most suitable finance agreement from a lender you can trust. Fortunately, that’s where we can help.
At Rangewell, we’re an Access to Finance specialist who’s mapped over 400 lenders to offer you an overview of more than 23,000 business finance products. Our services are free to use and we’ll also guide you through the application process. So if you’re looking to raise capital for your start-up or SME, apply for Alternative Business Finance today or find out more with Rangewell.