No matter what stage of development your business is at, you need to develop and find new sources of profit and financing to be competitive. Today, in addition to traditional ways to raise additional capital, such as bank loans and IPOs, there are many alternative options. Let’s try to understand the difference between capital raising and fundraising.
Common sources of capital raising
Raising capital is when a person has the opportunity to get seed money to start a business or perhaps real estate. Capital is invariably the determining factor in the success and growth of any business. In this case, the idea is useless if you cannot raise capital to make it a reality.
When forming the capital structure, the CFO must determine which asset financing sources will maximize the company’s value (value) to the greatest extent. So, the main external sources of capital raising for the enterprise are:
- Bank loan with real estate collateral. Short term 1-5 years. Long-term over 5 years. Banks can also use investment credit, lending to each other (interbank credit).
- Investment tax credit – deferral of tax payments. The loan is interest-bearing. It is provided through the tax authorities.
- Investment loans to each other by enterprises and entrepreneurs (but for a long period of time is very difficult) not only in cash but also in commodity form.
- IPOs – both by the companies themselves and through investment funds.
- Accounts payable by enterprises to each other – can be considered a source of investment.
- Subsidiaries may receive investment resources from the parent company. It is typical for franchising, parent companies, and small franchisees selling goods or services to large firms. Reverse investment is also possible.
- Venture capital – for mastering the production of new goods and new technologies. Venture firms are innovating, innovating. These investments are risky, but you can get big profits if you are lucky.
- Auxiliary sources – voluntary charitable contributions of patrons, insurance premiums, proceeds from the sale of pledged property of debtors, and sponsorship contributions.
What is fundraising?
Fundraising is another way of obtaining funding, which is typical for commercial and non-profit organizations. It is a targeted systematic search for sponsorship (or other) funds for implementing socially significant projects (programs, actions) and support for socially significant institutions. Its essence is to attract missing or inaccessible investments, labor, or any other resources for the company from external sources, which can be funded by other companies, individuals, or state and international institutions. Fundraising involves raising funds from various sources. Allocate mechanisms for self-financing and fundraising, as well as attracting resources from external sources.
Fundraising has the following peculiarities:
- it’s not just a search for money, but your work to solve specific problems for which money is needed;
- in fundraising, the main thing is not money but relationships (moreover, long-term relationships between people are desirable);
- at the center of the whole fundraising process is a person (the right person in the right place at the right time);
- fundraising does not extort money but always offers something in return (for example, joy or inspiration to someone who can support the organization).
The key mechanism of fundraising is an endowment (donation). This trust fund is intended for non-commercial purposes, as a rule, for financing educational, medical, and cultural organizations. It is formed mainly through charitable donations or special targeted contributions. The difference between an endowment and a regular charitable organization is the strictly targeted nature of the activity (usually, an endowment is created to support any one organization, for example, a certain university) and the focus on generating income by investing funds.