ALKESH DINESH MODY INSTITUTE FOR FINANCIAL AND MANAGEMENT STUDIES Department of Mumbai University

Financial Markets & Institutions

Different Methods to Raise Capital for Expansion

Submitted to: Prof. Kunal Nadkarni

Submitted by: Shivangi Mathur Roll No. 16 SYMMS

Raising capital - Raising Capital refers to obtaining capital from investors or venture capital sources. Therefore raising capital normally refers to a new issue of equity by a listed entity. However, in its broadest sense, it can mean the raising of money (either debt or equity) through a wide range of means. Capital is the amount of financial resources needed to implement and execute a business plan. Before a business sells its first product or service, it needs financial resources for product development, sales, marketing, administrative support, the company's formation, and countless other critical business functions. Capital should not be perceived as just the amount of "cash on hand" but rather the amount of financial resources available to support the execution of a business plan. While financial resources come in countless forms, types, and structures, two basic types of financial resources are available to most businesses: debt and equity. Debt represents a liability or obligation of a business. Debt is generally governed by mutually agreed upon terms and conditions as provided by the party extending credit. For example, a bank lends $2 million to a company to purchase additional production equipment to support expansion. The bank establishes the terms and conditions of the debt agreement, including the interest rate, repayment term, collateral required, and other elements. These terms and conditions must be adhered to by the company, or it runs the risk of default. Equity represents an investment in the business, usually doesn't have set repayment terms, but the owners of the equity investments do have a right to future earnings they may be paid dividends or distributions if profits and cash flows are available. For example, a software technology company requires $2 million in capital to develop and launch a new software solution. A venture capitalist group invests the required capital under the terms and conditions present in the equity offering, including what their percentage ownership in the company will be, rights to future earnings, representation on the board of directors, conversion rights, and so on. The company isn't required to remit any payments to the capital source per a set repayment agreement but has given up a partial right to ownership (which can be even more costly).

Why capital is needed? For starting business. For expansion. For working capital requirement, etc

Financing a Project

There are numerous funding opportunities available to raise capital for the business. It is important to conduct a fair amount of research before choosing a particular way to raise the capital. For every business it is extremely important to seek different sources of appropriate funding . When an entrepreneur s able to successfully raise the desired amount of capital, the new business will be able to thrive. It may take a considerable amount of time to break-even and earn revenue; therefore , having this type of financial security is beneficial for the entrepreneur and the viability of the new business. A new enterprise needs capital to finance its everyday business expenses. This can include property rent, employee salaries , marketing expenses , inventory ,day to day operations and maintenance. Raising funds keeping expansion in mind. Many prospective entrepreneurs will agree that raising startup capital for a new business is not easy. However, according to existing business owners, the process of raising capital to expand an established business may be considered even harder.

Different Methods of raising capital:

A company may raise funds for different purposes depending on the time periods ranging from very short to fairly long duration. The total amount of financial needs of a company depends on the nature and size of the business. The scope of raising funds depends on the sources from which funds may be available. The business forms of sole proprietor and partnership have limited opportunities for raising funds. They can finance their business by the following means :-

1) Equity Financing: This type of financing is essentially an exchange of money for a piece of ownership in a new business .This type of financing can usually be provided by venture capitalist and angel brokers.The act of raising money for company activities by selling common or preferred stock to individual or institutional investors. In return for the money paid, shareholders receive ownership interests in the corporation. It is the most important method. The liability of shareholders is limited to the face value of shares, and they are also easily transferable. A private company cannot invite the general public to subscribe for its share capital and its shares are also not freely transferable. But for

public limited companies there are no such restrictions. There are two types of shares :

Equity shares :- the rate of dividend on these shares depends on the profits available and the discretion of directors. Hence, there is no fixed burden on the company. Each share carries one vote.

Preference shares :- dividend is payable on these shares at a fixed rate and is payable only if there are profits. Hence, there is no compulsory burden on the company's finances. Such shares do not give voting rights.

Equity types:

IPO QIP ADR/ GDR

Initial Public Offer( IPO ): An initial public offering (IPO), is the first sale of stock by a formerly private company. It can be used by either small or large companies to raise expansion capital and become publicly traded enterprises. Many companies that undertake an IPO also request the assistance of an Investment Banking firm acting in the capacity of an underwriter to help them correctly assess the value of their shares, that is, the share price. When a company lists its securities on a public exchange, the money paid by investors for the newly issued shares goes directly to the company (in contrast to a later trade of shares on the exchange, where the money passes between investors). An IPO, therefore, allows a company to tap a wide pool of investors to provide it with capital for future growth, repayment of debt or working capital. A company selling common shares is never required to repay the capital to investors. Qualified institutional placement (QIP) is a capital raising tool, primarily used in India, whereby a listed company can issue equity shares, fully and partly convertible debentures, or any securities other than warrants which are convertible to equity shares to a Qualified Institutional Buyer (QIB). Apart from preferential allotment, this is the only other speedy method of private placement whereby a listed company can issue shares or convertible securities to a select group of persons. QIP scores over other methods because the issuing firm does not have to

undergo elaborate procedural requirements to raise this capital. Benefits of Qualified Institutional Placements Time Saving: QIBs can be raised within short span of time rather than in FPO, Right Issue takes long process. Rules & Regulations: In a QIP there are fewer formalities with regard to rules and regulation, as compared to Follow-on Public Issue (FPO) and Rights Issue. A QIP would mean that a company would only have to pay incremental fees to the exchange. Additionally in the case of a GDR, you would have to convert your accounts to IFRS (International Financial Reporting Standards). For a QIP, companys audited results are more than enough Cost Efficient: The cost differential vis--vis a ADR/GDR or FCCB in terms of legal fees, is huge. Then there is the entire process of listing overseas, the fees involved. It is easier to be listed on the BSE/NSE vis--vis seeking a say Luxembourg or a Singapore listing. Lock-In: It provides an opportunity to buy non-locking shares and as such is an easy mechanism if corporate governance and other required parameters are in place American Depository Receipts: They are popularly known as ADRs were introduced in the American market in 1927. ADR is a security issued by a company outside the U.S. which physically remains in the country of issue, usually in the custody of a bank, but is traded on U.S. stock exchanges. In other words, ADR is a stock that trades in the United States but represents a specified number of shares in a foreign corporation.Thus, we can say ADRs are one or more units of a foreign security traded in American market. They are traded just like regular stocks of other corporate but are issued / sponsored in the U.S. by a bank or brokerage.

ADRs were introduced with a view to simplify the physical handling and legal technicalities governing foreign securities as a result of the complexities involved in buying shares in foreign countries. Trading in foreign securities is prone to number of difficulties like different prices and in different currency values, which keep in changing almost on daily basis. In

view of such problems, U.S. banks found a simple methodology wherein they purchase a bulk lot of shares from foreign company and then bundle these shares into groups, and reissue them and get these quoted on American stock markets. For the American public ADRs simplify investing. So when Americans purchase Infy (the Infosys Technologies ADR) stocks listed on NASDAQ, they do so directly in dollars, without converting them from rupees. Such companies are required to declare financial results

according to a standard accounting principle, thus, making their earnings more transparent. An American investor holding an ADR does not have voting rights in the company. The above indicates that ADRs are issued to offer investment routes that avoid the expensive and cumbersome laws that apply sometimes to non-citizens buying shares on local exchanges. ADRs are listed on the NYSE, AMEX, or NASDAQ.

Global Depository Receipt (GDR): These are similar to the ADR but are usually listed on exchanges outside the U.S., such as Luxembourg or London. Dividends are usually paid in U.S. dollars. The first GDR was issued in 1990.

Advantages of ADR: There are many advantages of ADRs. For individuals, ADRs are an easy and cost effective way to buy shares of a foreign company. The individuals are able to save considerable

money and energy by trading in ADRs, as it reduces administrative costs and avoids foreign taxes on each transaction. Foreign entities prefer ADRs, because they get more U.S. .

exposure and it allows them to tap the American equity markets. The shares represented by ADRs are without voting rights.

However, any foreigner can

purchase these securities whereas shares in India can be purchased on Indian Stock Exchanges only by NRIs or PIOs or FIIs. The purchaser has a theoretical right to exchange

the receipt without voting rights for the shares with voting rights (RBI permission required)

but in practice, no one appears to be interested in exercising this right. Advantages of raising equity :

The funding is committed to your business and your intended projects. Investors only realise their investment if the business is doing well, eg through stock market flotation or a sale to new investors.

The right business angels and venture capitalists can bring valuable skills, contacts and experience to your business. They can also assist with strategy and key decision making.

In common with you, investors have a vested interest in the business' success, ie its growth, profitability and increase in value.

Investors are often prepared to provide follow-up funding as the business grows.

Disadvantages of raising equity:

Raising equity finance is demanding, costly and time consuming. Your business may suffer as you devote time to the deal. Potential investors will seek background information on you and your business - they will closely scrutinise past results and forecasts and will probe the management team. However, many businesses find this discipline useful regardless of whether or not they actually receive any funding.

Depending on the investor, you will lose a certain amount of your power to make management decisions.

You will have to invest management time to provide regular information for the investor to monitor.

At first you will have a smaller share in the business - both as a percentage and in absolute monetary terms. However, your reduced share may become worth a lot more in absolute monetary terms if the investment leads to your business becoming more successful.

There can be legal and regulatory issues to comply with when raising finance, eg when promoting investments

2) Loans from financial institutions/commercial banks: Long-term and medium-term

loans can be secured by companies from financial institutions like the Industrial Finance Corporation of India, Industrial Credit and Investment Corporation of India (ICICI) , State level Industrial Development Corporations, etc. These financial institutions grant loans for a maximum period of 25 years against approved schemes or projects. Loans agreed to be sanctioned must be covered by securities by way of mortgage of the company's property or assignment of stocks, shares, gold, etc.Medium-term loans can be raised by companies from commercial banks against the security of properties and assets. Funds required for modernisation and renovation of assets can be borrowed from banks. This method of financing does not require any legal formality except that of creating a mortgage on the assets. Debt Syndication:

Fund base Non fund base

Fund base Cash Credit This is the primary method in which banks lend money against the security of commodities and debt. It runs like a current account except that the money that can be withdrawn from this account is not restricted to the amount deposited in the account. Instead, the account holder is permitted to withdraw a certain sum called "limit", "credit facility" in excess of the amount deposited in the account. Cash Credits are, in theory, payable on demand. These are, therefore, counter part of demand deposits of the Bank. Working capital: Firms need cash to pay for all their day-to-day activities. They have to pay wages, pay for raw materials, pay bills and so on. The money available to them to do this is known as the firm's working capital. The main sources of working capital are the current assets as these are the short-term assets that the firm can use to generate cash. However, the firm also has current liabilities and so these have to be taken account of when working out how much working capital a firm has at its disposal.

Working capital is therefore Current Assets (stock + debtors + cash) minus Current liabilities. Working capital is the same as net current assets, and is an important part of the top half of the firm's balance sheet. It is vital to a business to have sufficient working capital to meet all its requirements. Many businesses have undergone bankruptcy, not because they were unprofitable, but because they suffered from a shortage of working capital. Bank Overdraft: The word overdraft means the act of overdrawing from a Bank account. In other words, the account holder withdraws more money from a Bank Account than has been deposited in it. An overdraft occurs when withdrawals from a bank account exceed the available balance which gives the account a negative balance - a person can be said to be "overdrawn". If there is a prior agreement with the account provider for an overdraft protection plan, and the amount overdrawn is within this authorised overdraft, then interest is normally charged at the agreed rate. If the balance exceeds the agreed terms, then fees may be charged and higher interest rate might apply Term loan: Term Loan are the counter parts of Fixed Deposits in the Bank. Banks lend money in this mode when the repayment is sought to be made in fixed, pre-determined installments. This type of loan is normally given to the borrowers for acquiring long term assets i.e. assets which will benefit the borrower over a long period (exceeding at least one year). Purchases of plant and machinery, constructing building for factory, setting up new projects fall in this category. Financing for purchase of automobiles, consumer durables, real estate and creation of infra structure also falls in this category. Bill discounting: Bill discounting is a major activity with some of the smaller Banks. Under this particular type of lending, Bank takes the bill drawn by borrower on his(borrower's) customer and pay him or her immediately deducting some amount as discount/commission. The Bank then presents the Bill to the borrower's customer on the due date of the Bill and collect the total amount. If the bill is delayed, the borrower or his customer pay the Bank a pre-determined interest

depending upon the terms of transaction. Project Financing: Project finance is the financing of long-term infrastructure and industrial projects based upon a complex financial structure where project debt and equity are used to finance the project, rather than the balance sheets of project sponsors. Usually, a project financing structure involves a number of equity investors, known as sponsors, as well as a syndicate of banks that provide loans to the operation. Non Fund Base Letter of Credit: The LC can also be the source of payment for a transaction, meaning that redeeming the letter of credit will pay an exporter. Letters of credit are used primarily in international trade transactions of significant value, for deals between a supplier in one country and a customer in another. They are also used in the land development process to ensure that approved public facilities (streets, sidewalks, storm water ponds, etc.) will be built. The parties to a letter of credit are usually a beneficiary who is to receive the money, the issuing bank of whom the applicant is a client, and the advising bank of whom the beneficiary is a client. Almost all letters of credit are irrevocable, i.e., cannot be amended or cancelled without prior agreement of the beneficiary, the issuing bank and the confirming bank, if any. In executing a transaction, letters of credit incorporate functions common to giros and Traveller's cheques. Typically, the documents a beneficiary has to present in order to receive payment include a commercial invoice, bill of lading, and a document proving the shipment was insured against loss or damage in transit. However, the list and form of documents is open to imagination and negotiation and might contain requirements to present documents issued by a neutral third party evidencing the quality of the goods shipped, or their place of origin.

Advantages of borrowings:

Borrowing allows you to have control of your own destiny regarding your business. You do not have investors or partners to answer to and you can make all the

decisions. You own all the profit you make.

If you finance your business using debt(borrowing), the interest you repay on your loan is tax-deductible. This means that it shields part of your business income from taxes and lowers your tax liability every year. Your interest is usually based on the prime interest rate.

The lender(s) from whom you borrow money do not share in your profits. All you have to do is make your loan payments in a timely manner.

You can apply for a Small Business Administration loan that has more favorable terms for small businesses than traditional commercial bank loans.

Disadvantages of borrowings:

The disadvantages of borrowing money for a small business may be great. You may have large loan payments at precisely the time you need funds for start-up costs. If you don't make loan payments on time to credit cards or commercial banks, you can ruin your credit rating and make borrowing in the future difficult or impossible. If you don't make your loan payments on time to family and friends, you can strain those relationships

3) Issue of debentures: Companies generally have powers to borrow and raise loans by issuing debentures. The rate of interest payable on debentures is fixed at the time of issue and is recovered by a charge on the property or assets of the company, which provide the necessary security for payment. The company is liable to pay interest even if there are no profits. Debentures are mostly issued to finance the long-term requirements of business and do not carry any voting rights.

Advantages:

Control: Debt financing allows the borrower to retain ownership on the control of the business, unlike equity financing which require the borrower to part with share of company ownership and surrender decision making autonomy. In debt financing, the third party creditor has no monetary interest in the business, except for the principal and interest income.

Retain Profit : Debt financing allows the entrepreneur to retain the profit earned by

the business without sharing it with the debtor. The lender does not have any share or stake in the profit and only gets the loan payments in the set time, and only for the agreed upon period. This is in contrast to equity financing which requires sharing the profits and losses for eternity.

Limited Obligation: In debt financing, the borrowers obligation ends with the repayment of the principal and the interest to the lender. The obligations that come with taking up a partner in equity financing remains permanent and irrevocable, unless the partner willingly sells his or her stake and the entrepreneur can buy ut back at the price offered.

Tax Deduction: One of the most attractive aspects of debt financing is tax advantages. The interest on borrowed money, paid to the lender is tax-deductible. This means exemption from paying tax for the part of business income used to pay interest, lowering the tax liability of the business.

Timely Payments: Timely repayment of debt enhances and improves the credit rating of the business, making it easier to obtain other types of financing in the future.

Easy Administration: Debt financing is easy to manage and administer, and require no extensive or complex reporting requirements. In contrast, issuing shares to source equity financing require compliance with complex regulations under the Federal and State Security laws and regulations.

Future Planning: In debt financing, the principal repayments and interest are calculated before hand, and does not depend on market conditions. This allows for better planning and forecasting.

Less expensive: Long-term debt financing turns out to be less expensive for businesses owing to spreading out of the capital repayment over many months, and the likelihood of the investments maturing and providing good returns

Disadvantages:

Repayment: A debt requires repayment irrespective of whether the debtor makes a profit or loss with the loan. This is in contrast to equity financing where the repayment bases itself on the actual performance of the borrowed money

High Cost: The fixed interest costs can raise the companys break-even point, or the point where no profit and no gain occurs.

Restricted Cash Flow: Debt repayments are a fixed obligation regardless of profits,

loss, or delayed payments. This raises the risk of insolvency for the business, especially during difficult financial periods.

Budget: Debt financing requires accounting and budgeting the principal and interest in the cash flow statements.

Restrictions: Just as equity financing restricts the decision-making powers of an entrepreneur, debt financing also impose restrictions such as not allowing for alternative financing options when the debt remains in place.

Collateral Security: Creditors require some type of collateral security to cover the value of the loan.

Risk Outlook: Debt financing increases the company's risk outlook, for higher the businesss debt-equity ratio, the more risky the company becomes for other lenders and investors.

4) Public Deposits :Companies often raise funds by inviting their shareholders, employees and the general public to deposit their savings with the company. The Companies Act permits such deposits to be received for a period up to 3 years at a time. Public deposits can be raised by companies to meet their medium-term as well as short-term financial needs. The increasing popularity of public deposits is due to :

The rate of interest the companies have to pay on them is lower than the interest on bank loans.

These are easier methods of mobilising funds than banks, especially during periods of credit squeeze.

They are unsecured. Unlike commercial banks, the company does not need to satisfy credit-worthiness for securing loans.

5) Reinvestment of Profits: Profitable companies do not generally distribute the whole amount of profits as dividend but, transfer certain proportion to reserves. This may be regarded as reinvestment of profits or ploughing back of profits. As these retained profits actually belong to the shareholders of the company, these are treated as a part of ownership capital. Retention of profits is a sort of self financing of business. The reserves built up over the years by ploughing back of profits may be utilised by the company for the following

purposes :

Expansion of the undertaking Replacement of obsolete assets and modernisation. Meeting permanent or special working capital requirement. Redemption of old debts.

Advantages:

The benefits of this source of finance to the company are :It reduces the dependence on external sources of finance. It increases the credit worthiness of the company. It enables the company to withstand difficult situations. It enables the company to adopt a stable dividend policy.

6) Venture Capital: Venture capital (VC) is financial capital provided to early-stage, highpotential, high risk, growth start up companies. The venture capital fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as biotechnology, IT, software, etc. The typical venture capital investment occurs after the seed funding round as growth funding round (also referred as Series A round) in the interest of generating a return through an eventual realization event, such as an IPO or trade sale of the company. Venture capital is a subset of private equity. Therefore all venture capital is private equity, but not all private equity is venture capital. The Process The investment process, from reviewing the business plan to actually investing in a proposition, can take a venture capitalist anything from one month to one year but typically it takes between 3 and 6 months. There are always exceptions to the rule and deals can be done in extremely short time frames. Much depends on the quality of information provided and made available. The key stage of the investment process is the initial evaluation of a business plan. Most

approaches to venture capitalists are rejected at this stage. In considering the business plan, the venture capitalist will consider several principal aspects: Is the product or service commercially viable? Does the company have potential for sustained growth? Does management have the ability to exploit this potential and control the company through the growth phases? Does the possible reward justify the risk? Does the potential financial return on the investment meet their investment criteria? In structuring its investment, the venture capitalist may use one or more of the following types of share capital: Ordinary shares These are equity shares that are entitled to all income and capital after the rights of all other classes of capital and creditors have been satisfied. Ordinary shares have votes. In a venture capital deal these are the shares typically held by the management and family shareholders rather than the venture capital firm. Preferred ordinary shares These are equity shares with special rights.For example, they may be entitled to a fixed dividend or share of the profits. Preferred ordinary shares have votes. Preference shares These are non-equity shares. They rank ahead of all classes of ordinary shares for both income and capital. Their income rights are defined and they are usually entitled to a fixed dividend (eg. 10% fixed). The shares may be redeemable on fixed dates or they may be irredeemable. Sometimes they may be redeemable at a fixed premium (eg. at 120% of cost). They may be convertible into a class of ordinary shares.

Loan capital Venture capital loans typically are entitled to interest and are usually, though not necessarily repayable. Loans may be secured on the company's assets or may be unsecured. A secured loan will rank ahead of unsecured loans and certain other creditors of the company. A loan may be convertible into equity shares. Alternatively, it may have a warrant attached which gives the loan holder the option to subscribe for new equity shares on terms fixed in the warrant. They typically carry a higher rate of interest than bank term loans and rank behind the bank for payment of interest and repayment of capital Advantages of venture capital:

Business Consultations - Many venture capital firms have consultants on their staff that are well versed in specific markets. This can help a start up firm avoid many of the pitfalls that are often associated with start-up business ventures.

Management Consultations - Unfortunately, not all entrepreneurs are good business managers. Since venture capital firms almost always require a percentage of equity in the start-up firm, they likely will have a say in how the firm is managed. For the nonmanagement expert, this can be a significant benefit.

Human Resources - In terms of finding the best talent for start up firms, venture capital firms often provide consultants who are specialists in hiring. This can help a start up firm avoid the pitfalls of hiring the wrong people for their company.

Additional Resources - Starting a new business is fraught with concerns about legal matters, payroll matters, and tax issues. It is not unusual for a venture capital firm to take an interest in providing these resources since they have a vested interest in the success of the company.

Disadvantages of venture capital:

Management Position - In many cases, a venture capital firm will want to add a member of their team to the start up company's management team. This is generally to ensure that the company can be successful, though this can also create internal problems.

Equity Position - Most venture capital firms require that the company give up an equity position to them in return for their funding. This amount is not small, in many

cases it can be as much as 60 percent of the equity in the company. In effect, this means that the entrepreneur is not controlling their business; it is being controlled by the venture capital firm.

Decision Making - One of the biggest problems that many entrepreneurs face when they agree to accept venture capital is they often are giving up many key decisions in how their company will operate. Venture capital firms that have taken an equity position want a "seat at the table" when any major decision is made and they often have the power to override decisions.

Business Plans - When a business plan is written and submitted for financing considerations, most finance companies will agree to sign a non-disclosure agreement. This is not the case in most venture capital firms. Venture capital firms will nearly always refuse to sign a non-disclosure agreement due to the legal ramifications of doing so. This can put ideas from an entrepreneur at risk.

Funding Plan - If an entrepreneur writes their business plan and determines they need $500,000 to get the business launched, they may be lulled into thinking that these funds will come up front. This is simply not the case. Venture capital firms almost always set goals and milestones for releasing funds. Funding from venture capital firms is typically done in stages with an eye on the expansion of the business.

7) Angel Investor: An angel investor or angel (also known as a business angel or informal investor) is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. A small but increasing number of angel investors organize themselves into angel groups or angel networks to share research and pool their investment capital.

Can provide the needed capital for a start up : When entrepreneurs have exhausted money from friends and family, personal savings, bank loans, and credit cards for their start ups, they may seek angel investors to help them fill their needed equity gap. According to the Centre for Venture Research at the University of New Hampshire, nearly 2/3 of funding for new enterprises is obtained from angel investors. Therefore, angel investor capital can provide a great source of funding for new businesses that have a high potential for growth.

Ability to raise capital in small amount : Most early-stage ventures require small amounts of money, typically less than $500,000. Angel investors can provide this

needed amount, using their own personal funds for the investment. Venture capitalists, on the other hand, typically pool money from different sources, generally invest in later-stage companies that have already established stability and success, and invest in enterprises in need of at least $500,000 to $1 million.

Flexible business agreements: Angel investors have a more informal investment criteria compared to the traditional financial lenders, including banks and venture capitalists. Because they are investing their own money, their business deals can often be negotiable. Because of this flexibility, they are more likely to be excellent sources of capital for early-stage businesses.

Can bring forth vast knowledge and experience to a new company: Many angel investors were once entrepreneurs themselves and have founded several successful companies under their leadership; therefore, they will not only provide the needed capital that entrepreneurs need but they can also offer desired support, expertise, and contacts in making a business grow. An angels insight and resources are of tremendous value for a companys success, and an entrepreneur should always recognize the need for help, embracing the participation of their angel investor in daily business activities.

Involved in high risk investments : An angel investors capital in a new business is considered to be a high-risk investment since the new company has not yet established a solid track record of success. Since they often provide the initial funding for a new company, it can be quite difficult to determine if their invested enterprise will be successful in the long run. Despite the fact that most new businesses fail in their initial years, angel investors tend to be quite optimistic about their investment choices and often request a large amount of returns to counterbalance the risk.

Does not require high monthly fees: Another benefit from raising angel capital is that there are no outstanding payment rates such as the ones that bank loans and credit cards require. Many entrepreneurs enjoy this element of angel investors, concentrating their time and effort into taking their new business forward rather than worrying about high monthly payments and fees that traditional lenders enforce.

Community involvement: Many angel investors choose to invest locally. The capital they provide for a new business will not only assist the launch of a new enterprise but it will also create employment opportunities and help stimulate economic growth by encouraging consumers to purchase their products. Many angel investors take pride in

using their expertise in giving back to their community. These are the angel investors who look beyond monetary return.

Are located everywhere, in practically all industries: Nowadays, angel investors can be found everywhere, not just in traditional financial centres and districts. They also invest in nearly all markets worldwide. The majority of them are involved in industryspecific investments, according to the level of their expertise. Similar to venture capitalists, angel investors tend to focus on technology, but are also attracted to other types of industries as well. Regardless of the market sector that an angel is involved in, what attracts an angel investor to a specific venture is the potential for a companys profitability and growth. Disadvantages

Rarely make follow-on investments : The reason why most angel investors are less likely to make follow-on investments is because of the risk associated with losing even more money when reinvesting in an unsuccessful company. On the other hand, venture capitalists have a different approach to follow-on investing. They tend to spend approximately 2/3 of their funds on follow-on investments, taking the opportunity to allow companies to expand while diversifying their current portfolio firms.

Can actually be deceptive :While the majority of angel investors truly look beyond the promise of monetary return, there are a few angel investors who are greedy and motivated by money rather than in promoting the good of the firm. These angel investors tend to be less patient with new entrepreneurs and do not provide any mentoring or guidance during a companys early stage of development. To avoid such complications, it is crucial that an entrepreneur obtain complete information about the character and reputation of any potential investors before pursuing and agreeing to any terms.

Can be costly :In exchange for providing the needed start up capital for a new company, many angel investors often require a certain percentage of stake in a company, starting at 10% or more, and expect a large ROI for their exit. From their perspective, this is a reasonable exchange since they are investing in very young and risky businesses that have not yet been established. In addition, angel investors may

hire skilled professionals to ensure the day-to-day business operations.

Active company involvement can lead to problems : Each level of company involvement varies from investor to investor; however, it is not uncommon for an angel investor to have a certain amount of control in running a company. The entrepreneur may unwillingly be forced to give up some degree of control in order to meet their angel investors requirements, which can often lead to resentment on the part of the entrepreneur. Another problem that may arise is the angel investors lack of industry experience. This limited knowledge adds very little value to a companys success. That is why entrepreneurs should only seek angel investors with proven experience in their industry.

Do not have national recognition : While there are well-documented directories of venture capital firms available, there is no national register for angel investors. Due to these differences, angel investors do not have the national recognition as their VC counterparts. They remain hidden and mysterious but choose to do so in order to have a degree of separation from entrepreneurs, who may pester them with their business plans and telephone calls.

8) Private Placement: This is a source of equity capital for private company that has decided not to go public. It is commonly used by company to raise a specific amount of capital in a short period of time. The company will offers stock to a few private investors, rather than announcing public offering. A private placement happens when a company offers its securities directly to an individual or a small group of people who will invest, instead of offering it to the public. These offerings need not be registered to the Securities and Exchange Commission or SEC, and are also exempted from the typical reporting compliance. Advantages: Private placement of investments is considered by experts to be more practical, costeffective and time-saving manner of raising pertinent capital without the need to go public. A lot of investors are looking into going to private placements instead, because of the many advantages it offers. These days, financial experts advise companies who want to go public, to choose

private placement of securities instead, not only because it is cheaper, but also it is less time consuming. It also involves a limited number of people. This is considered best for companies who are not strong financially, yet they need to seek funds to expand. For new ventures, private placement is also advantageous, because if they do not have the reputation yet, it may be difficult to appeal to the investing public. There are many advantages in choosing private placements in contrast to IPOs. Private placements do not require the service of underwriters or brokers, which is why it is considerably cheaper and consumes less time. Aside from this, private placements could be the only source of available capital to start up firms or risky ventures. A private placement of securities could enable the proprietor to choose and hand pick the investors who may have similar goals and interests. Since the investors could be people of higher financial status, it is possible for the company to place the securities in a more confidential transaction. If the investors are experienced businessmen, you can also take advantage of their input in regards to the management of the company. Private placements also allow you to maintain your privacy, offering your securities without divulging the information regarding your business and liquidity. Disadvantages: It could be challenging to find investors to suit your interests and needs. And if you are lucky to find some, they could have limited funds to fully invest in your company. Private placement of securities are also commonly sold below the normal market value. You may need to relinquish more equities, too, because your investors could demand for more compensation in taking a bigger risk in assuming an illiquid status with your company.

References: Google.com Investopedia.com Wikipedia.com