When we hear that a the company has carried out or is seeking a capital increase, We imagine a company on the IBEX 35, or a company that has just started its activity on the Stock Market, in any country. Nothing further than that. But it's not like that. To understand what it means, how and why a capital increase is carried out, we must first understand well what it means to increase it.
When we talk about capital increase, we talk about the total share capital of the company will increase, which does not have to be a large company to have it, in fact, all corporations and limited liability companies have a minimum share capital.
What is the social capital?
A company has a set of goods that give it a value. Social capital has been the set of goods and money that a company owns, normally represented in shares, which are registered property titles.
El social capital indicates the economic value of the company for its start-up. Being, in Spain, for limited and sole proprietorships of € 3005.60, for the public limited companies is € 60.101.20 divided into individual shares.
Many companies meet the minimum mentioned to start their business, and do not move it, but the Initial value can be changed up or down. Later we will see how and why it is done.
Thus, each holder of shares or titles is called a shareholder or partner, who represents the property of the company. Therefore, For accounting purposes, the capital stock is a debt with respect to the partners.
The partners or shareholders can be of different types:
- The general partners, who participate in the decisions of the company and risk their capital in profit or loss of the company
- The preferred partners, that contribute capital, and obtain profits / losses but do not participate in the decisions of the company.
The share capital is not affected by company losses, but can be decreased or increased, we will see more about this later.
What is a capital increase?
Being clear about what social capital is, we can understand that a capital increase is precisely to provide greater value and assets to the company. There are different ways to do it and advantages that we will see below.
There are two typical ways to increase the value of a business:
- Issue new shares to partners or new partners, or, increasing the value of the shares already issued. Depending on the objectives of the company, it is decided by one option or another: new partners are not always sought.
- In the second case, it is simply increases the nominal value of the sharesThus, the value of a company increases, without the capital outlay of the shareholders.
The question is: why does a business need financing?
A company, large or small, involves a constantly growing flow of capital inflows and outflows, as long as the input is more than the output money. For a business to function, it needs furniture, equipment, staff, and raw materials to make it function. To do this, you need shareholders or partners.
This company is doing so well that it needs to open a branch within or outside of Spain, to gain competitiveness and increase profits. Opening the other business implies expenses in premises, equipment and everything again, so money is needed, sometimes a lot of money.
The company has two options: ask for a loan from a bank, and pay it with their respective interests, or, get money through a capital increase, opening the door to new partners who leave money to the company.
The second option is also a form of loanWell, in accounting terms, all the capital stock is, as we have said, a debt to the partners of the company. It is an option with a lower cost than that of a bank loan, and it depends only on the risks that the company has and the power of persuasion to seduce new partners.
Advantages of increasing the share capital of a company
Get money without interest
We already mentioned it before: Increasing capital prevents the company from paying interest and even mortgaging assets. It is money at “zero cost”. It is not necessarily to expand the business: you can invest it in marketing campaigns, in better qualified personnel, in the development of new products or services, or simply in improving the ones you have.
Increase the value of the company
Not only the company that capital increases have more money to invest, but its value as a company increases. This has repercussions not only morally speaking, but financially speaking you can access more and better credit opportunities, since you enjoy better financial health.
To give an example: it is easier to access a loan to a company with a share capital of € 150.000, than one that goes with the legal minimum of € 60.000.
It has a higher reputation
Without a doubt, a company, large or small, that does capital increases greatly improve your image, your brand is valued in front of suppliers and even with customers.
When to increase capital?
As we said before, most SMEs are established with the legal minimum, and little by little they increase the capital, if at all, since the initial amount is becoming small with the operations of the company.
Experts say that many businesses do not know when to increase it, or even that starting the business with the legal minimum is already a mistake in the business, and it will mark it sooner or later.
Business experts assure that there are at least four moments in which the increase of share capital is almost mandatory, which are:
1. When there are growth opportunities. There are business opportunities that cannot be exploited due to lack of capital. Normally, no one takes out loans in business opportunities with certain levels of risk, and the business is affected or stagnant. This moment is ideal to increase the value of the company, without having to pay interest to a bank.
2. When the price is correct. You may need advice in this regard: imagine that you need € 100.000 to invest in your company, and the cost to obtain it is 20% of your company. Maybe next year, get those 100, they represent 45% of your company. Experts assure that the best moment is when the interest is equal to the price.
3. When your company needs to buy time. Finance experts calculate that the first three years of most companies work in losses, that is, it is the time in which the investment is normally recovered and debts incurred to create the company are paid. If you do not want to wait that long, or business is slow, it is a good idea to find partners or increase the capital of the company and reduce that time. But it must be done conscientiously, since you risk entering a deeper well if the business fails.
4. When advice is needed. Opening the doors of a company to new partners is not only a question of money. Sometimes the door is opened to specific investors or partners because they bring with them a greater experience and background than that of the partners, which helps them make better decisions. They are “guide” partners, rather than investors.
How is a capital increase done?
The capital increase It is important, it requires changing the statutes of the company, so a series of procedures must be followed to carry it out, in order to offer guarantees to the partners and creditors of the company.
To be specific, it is done in three steps:
1. Agreement of the General Meeting of the company
2 Execution
3. Register the increase in capital stock
First, a proposal must be made from the chairman of the board of directors or shareholders on the expansion, with the planned agenda. Although any holder of at least 5% of the value of the capital stock.
More than half of the holders of the company's capital stock must approve the capital increase through the entry of new partners, and of their totality to increase the value of the shares already issued.
Then, it must be recorded, by full disbursement if there is an investment, in the Mercantile Registry and its respective publication in the BORME (Official Gazette of the Mercantile Registry), which is something like the BOE.
The dreaded dilution effect
Everything has risks, and a capital increase too, and one of them is the so-called “capital dilution”. It implies the loss of property of at least one of the partners with respect to the rest, for not being able to subscribe or buy the shares to which it is entitled but cannot acquire.
It is easier with an example: Spain SA has 4 partners and € 100.000, in equal parts, that is, € 25.000 each, in shares with a value of € 1 each.
They want to double the value of the company, to € 200.000, and decide not to have new partners, but among themselves. It turns out that each one needs to invest € 25.000. But two do not have resources, so they keep their € 25.000 stake, and another two with € 50.000.
Two of the partners notably reduced ownership from 25% to 12.5%, thus diluting their power in the benefits and decisions of the company.
Conclusion
The companies, without necessarily going to the sale of their shares on the Stock Exchange, they can obtain income by increasing their share capital, and thus be able to invest it in new acquisitions, personnel or equipment.
It is key to do it at the right time, so that the company does not stagnate, although it should be done carefully, since there is a risk of capital dilution.