Capital Raising
Raising Capital for a Business in Canada: Debt, Equity and the Capital Structure
Raising capital is not simply about finding someone willing to provide funds. The source, cost, structure and terms of capital can affect cash flow, ownership, flexibility and the future strategic options available to a business.
Contents
- Start With the Business Objective
- The Main Sources of Business Capital
- Debt or Equity?
- Understanding the Cost of Capital
- How Much Capital Can a Business Support?
- Preparing to Approach Capital Providers
- Capital Raising Is Also a Positioning Exercise
- Why Capital Strategy Should Begin Early
- How CFM Approaches Capital Raising
Established businesses raise capital for many reasons.
A company may be expanding into a new market, acquiring another business, investing in equipment or capacity, recapitalizing its balance sheet or pursuing an opportunity that exceeds the capital available internally.
The immediate question is often: where can we obtain the capital?
A better starting point is: what type of capital is appropriate for what the business is trying to accomplish?
Debt, private credit, equity and strategic capital have different economics, risks and implications for the company and its shareholders.
The objective should therefore be to build an appropriate capital structure, not simply to obtain funding.
Start With the Business Objective
Capital should have a defined purpose.
The appropriate structure for financing an acquisition may be very different from the structure used to fund organic growth, provide shareholder liquidity or strengthen a company's balance sheet.
Common capital requirements can include:
- business acquisitions
- expansion and growth initiatives
- equipment and capital expenditures
- new facilities or markets
- working capital
- refinancing existing obligations
- shareholder buyouts
- recapitalizations
- strategic investments
Understanding the objective also helps determine how much capital is actually required and how the business expects to generate a return on that capital.
The Main Sources of Business Capital
Each source of capital carries different economics, risk and implications for ownership.
Senior Debt
Banks, credit unions and other commercial lenders may provide senior debt to established businesses with appropriate cash flow, financial strength and credit characteristics.
Senior debt generally has priority over other forms of financing and may offer a lower cost of capital than more junior or higher-risk financing.
However, availability and structure depend on the business, cash flow, security, leverage and purpose of the financing.
Private Credit and Structured Debt
Private credit and other non-bank lenders can provide capital where a transaction requires greater flexibility, speed, leverage or a structure that does not fit conventional senior lending.
That flexibility can come with higher financing costs or different structural requirements.
The relevant question is therefore not simply whether private capital is more expensive, but whether its flexibility creates sufficient strategic or economic value for the transaction.
Equity Capital
Equity investors provide capital in exchange for an ownership interest.
Unlike conventional debt, equity generally does not require scheduled principal and interest payments.
But it introduces a different economic cost: dilution of existing ownership and participation by the new investor in the future value of the company.
Equity may be appropriate where the company's opportunity, growth plans or existing leverage make additional debt unsuitable.
Strategic Capital
A strategic investor may bring more than funding.
Depending on the situation, strategic capital can potentially provide industry relationships, distribution, customers, expertise or other capabilities in addition to financial resources.
The strategic benefits must be weighed against ownership, governance and long-term alignment considerations.
The objective is not simply to raise capital. It is to build a capital structure that supports the business objective without creating unnecessary financial or ownership constraints.
Debt or Equity?
The choice between debt and equity is rarely as simple as determining which source is available.
Debt allows existing shareholders to retain ownership, but introduces repayment obligations, interest expense and potentially covenants or security requirements.
Equity does not generally create scheduled debt-service obligations, but it dilutes existing shareholders and can affect governance, control and future economic participation.
Important considerations may include:
- stability of cash flow
- existing leverage
- growth rate
- available security
- expected return on the capital
- shareholder objectives
- tolerance for dilution
- repayment capacity
- future capital requirements
- desired financial flexibility
In some situations, the appropriate answer is neither entirely debt nor entirely equity.
A combination can produce a more balanced capital structure.
Understanding the Cost of Capital
The interest rate is only one component of the cost of capital.
Debt financing may also involve fees, covenants, guarantees, amortization, security and restrictions on future activities.
Private or structured capital may involve higher interest rates, additional fees or other economic participation.
Equity has no conventional interest rate, but the economic cost can become significant if the business grows substantially after the investment.
Businesses should therefore evaluate capital based on its complete economic and strategic impact rather than comparing headline rates alone.
How Much Capital Can a Business Support?
The amount of capital available is not necessarily the amount the business should raise.
For debt financing, repayment capacity remains fundamental.
Capital providers may consider historical and projected cash flow, existing obligations, working-capital requirements, capital expenditures, leverage and the resilience of the business under different conditions.
Equity capacity is different because there is no scheduled repayment requirement, but raising excessive equity can unnecessarily dilute existing shareholders.
The capital requirement should therefore be tied to a credible use of funds and a realistic financial plan.
Preparing to Approach Capital Providers
Capital providers need to understand both the business and the opportunity.
Depending on the transaction, preparation may include:
- historical financial statements
- current interim financial results
- financial projections
- business and industry overview
- management background
- ownership structure
- existing debt and capital structure
- amount of capital required
- proposed use of funds
- transaction details where applicable
- explanation of the company's strategy and expected outcomes
The objective is not simply to assemble documents.
The information should tell a coherent financial and strategic story about the business, the capital requirement and how the proposed financing supports the company's objectives.
Capital Raising Is Also a Positioning Exercise
Different capital providers evaluate opportunities differently.
A bank may focus heavily on demonstrated repayment capacity and security.
A private credit provider may accept additional complexity in exchange for different economics.
An equity investor may focus more heavily on growth, management, market opportunity and potential future value.
A strategic investor may evaluate both financial returns and strategic fit.
How the opportunity is positioned should therefore reflect the type of capital being pursued without changing the underlying facts of the business.
Why Capital Strategy Should Begin Early
Capital raising can take time.
Waiting until the business urgently requires funds can reduce strategic options and negotiating leverage.
Earlier planning allows management and shareholders to evaluate alternatives, prepare financial information, consider the appropriate capital structure and approach potential sources from a stronger position.
This becomes particularly important when the capital is connected to a transaction such as an acquisition, shareholder buyout or major expansion.
How CFM Approaches Capital Raising
CFM begins with the business objective rather than a predetermined financing product.
We assess the company, capital requirement, existing capital structure and strategic objective before considering potential debt, private credit, equity or strategic capital alternatives.
CFM can then help structure and position the requirement, identify appropriate potential capital sources and coordinate the process toward execution.
Where the capital requirement is connected to an acquisition, commercial real estate transaction or broader M&A mandate, those considerations can be evaluated together.
Sebastien Charles is the Founder and Managing Director of CFM Financial Consulting Inc. His experience spans entrepreneurship, corporate finance, M&A, capital raising, commercial financing, executive leadership and governance.
This article is provided for general informational purposes only. Capital availability, financing terms and transaction structures depend on the specific business and circumstances. The information should not be considered financial, legal, tax, securities or investment advice. Equity and securities transactions may require the involvement of appropriately registered securities professionals where applicable.
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