The word capitalization comes from the word capital and it is related to the raising of funds or capital for the business. Capitalization in general terms is the process of generating money or capital that helps entrepreneurs to start their new business or startups. It is also popularly known as capital investment, capital funding, capital raising, capital finance, and sometimes backing as well.
There are many different sources of capital that an entrepreneur can find. Some of the popular ways of capital raising are Angel Investors, Small Business Loans, Equity & Debt Funding, Crowdfunding, Government Grants etc. However, one has to be very specific when it comes to raising capital, especially in the case of new businesses, as all sources of capital raising may not be equally suitable for every business and can have long-term effects on the functioning of the business. So, here comes the importance of capitalization strategy.
Building a capitalization strategy is very important for a new business. The entrepreneurs have to take into account the long-term effects, risks, and rewards of taking capital from different sources and finally select that particular source that best suits their business model or nature and capital structure. All these things help to determine how your capitalization strategy looks like.
Finding the Perfect Capital Source
Depending upon the business model, the following types of capital sources are best suited for a new business or startups company:
- Angel Investors: They are those individuals or groups that are interested in investing their money, especially on potential new businesses and startups. As an entrepreneur, you must present them with your portfolio and business model to impress them to invest in your new business. If your new business has that potential earning capacity, then it is very likely that you will be interested in investing their asset and money into your business.
- Equity Funding: It is raising capital by offering ownership, through the sale of shares or stocks. In other words, it is like offering a partnership. It is considered a good source of capital because it not only allows other investors a share in your company but also sometimes those investors could be real experts who could share their knowledge and expertise and help you to maximize the profit for your business. However, this type of funding is good only if you are ready to share the ownership and control, as well as profit & loss of your business.
- Debt Funding: As the name suggests, it is funding your business with debt or loan. Unlike equity funding, debt funding is best suited to those entrepreneurs who don’t like to share the ownership and control of their business. However, it also has some disadvantages, especially for new businesses like it is not easy to find the perfect loan with the right interest rates. It could also lead to serious consequences if unable to repay the interest in time.
- Micro Loans: These are small loans that are designed especially for small businesses to help them to meet their day-to-day financial needs, and because of the nature of these loans it is also very suitable for new business and startups. They are given for short periods and the interest rates are also low as compared to other types of loans.
Apart from the above-mentioned capital funding sources, there are also other types of funding like Small Business Loans, Crowdfunding, and Government Loans & Grants that are also very useful for new businesses. However, selecting the perfect capital source is all that matters for capitalization strategy.