How to Finance a Small Capital Business Using the Stock Market

Companies can use different ways to fund their small capital business through stock market, other than offering the business stocks in the initial public offering (IPO) option. For example, they can sell more stocks to investors, both individual and institutional, continuously through different options to finance their expansion of their operations or business. In fact, stock market is one of the safest ways to generate additional capital, instead of looking for borrowing from banks or other purpose-driven investment institutions.


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    Use of Stock As Collateral For Borrowing

    You can use the company stocks as collateral for borrowing from new investors. Through this method, a company pledges stocks, which are held by the management team or board members to new investors on a discount rate. These stocks will be offered at rates cheaper than the price of stocks held by the existing investors. It does not mean that stocks held by the management members are diluted.

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    Selling of Stock Through PIPE

    Another way is selling of the stocks to institutional investors through exclusive offering, commonly known as Private Investment in Public Equity. These stocks are offered at discounted rates, lower than the stocks market price, and the buyer immediately sells the stocks to earn profit from the discount. This can also lead to sharp fall in the stock price of the company.

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    Rights Shares

    Rights shares can be offered to existing investors through private placement, before the public offering. The investors have the right to exercise their options to buy the company stocks at a discount rate during a defined time period, before public offering. However, a condition that investors can set is that they should be allowed to buy additional than allowed stocks. The private placement is mainly for institutional investors, generally offered before the time of public offering. The company is allowed by the rules to generate capital to finance new project or operation expansion.

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    Collateralize Your Borrowings

    In case if it is a private company and you own it, you can collateralize your borrowings through the stocks you have invested in. Using the stocks as guarantee can help you secure loans from banks for up to 50 years. It is possible that some other investors in your company's stocks can offer their stocks as guarantee to seek loan from banks.

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