What is Capital Raising?
When a company needs money to grow, expand, or survive tough times, it must raise capital. There are two main ways to do this:
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Debt Financing
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Equity Financing
⚖️ Debt vs Equity: What’s the Difference?
| Feature | Debt Financing | Equity Financing |
|---|---|---|
| Definition | Borrowing money that must be repaid | Selling ownership (shares) in the company |
| Source | Banks, bonds, loans | Investors, venture capital, IPO |
| Repayment | Yes – fixed interest & schedule | No – investors get a share of profits |
| Ownership Dilution | No – owner keeps full control | Yes – new shareholders gain part ownership |
| Risk | Lower for investor, higher for company | Higher for investor, lower for company |
| Cost | Interest payments | Sharing profits or giving dividends |
🏦 1. Debt Financing (Like a Loan)
🔹 How it works:
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The company borrows money.
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Must repay with interest.
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Doesn't give away ownership.
🔹 Common forms:
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Bank loans
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Corporate bonds
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Lines of credit
✅ Pros:
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No loss of control
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Tax-deductible interest
❌ Cons:
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Must be repaid on time
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Increases financial pressure
Example:
A startup borrows $50,000 from a bank and agrees to repay it over 5 years at 8% interest.
📈 2. Equity Financing (Selling Ownership)
🔹 How it works:
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The company sells shares to raise money.
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Investors become part-owners.
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No obligation to repay money.
🔹 Common forms:
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Angel investors
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Venture capital
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Initial Public Offering (IPO)
✅ Pros:
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No repayment pressure
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Brings in experienced investors
❌ Cons:
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Loss of control
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Profits are shared
Example:
A company gives 20% of its ownership to an investor in exchange for $100,000.
🧠 Which One to Choose?
| Situation | Best Option |
|---|---|
| Stable cash flow | Debt |
| New business with high risk | Equity |
| Need to retain full control | Debt |
| Willing to share growth and profits | Equity |
🔚 Conclusion
Both debt and equity are powerful tools for raising capital. Debt is like renting money — you keep control but must repay. Equity is like selling part of your house — no repayment, but you share ownership. The right choice depends on your company’s goals, stage, and financial health.