A newly incorporated business in any form i.e. whether sole proprietor or partnership or LLP or Companies require funds or finance to grow and run its business effectively. The sales (revenue) are the main form of cashflows to the business. Sometimes the business requires additional funding for future growth and efficiency. Therefore the business approaches for outside finance or funding mainly to Banks/Financial Institution/NBFCs or Angel Investors or Venture Capitalists to fund their business.
Funding is the act of providing resources to finance a need, program, or project. Mainly the finance refers to working capital need or project financing or purchasing of an asset for the business. Therefore, funding of business plays a vital role in its achievement. In this article, we look at the types of funding available for businesses.
Financing a business through Banks/FI/ NBFCs are the common form of funding activity. Banks/FI/NBFCs provide various forms of business finance i.e.
1. Secured and unsecured loans,
2. bills finance,
1. project based loans (project finance),
2. credit facilities,
3. small business loans (SME Loans)
Banks have well structured process for providing loans to large businesses across the country. Similarly NBFCs are also a form or corporation which provides loans without much legal requirements as compared to Banks and FI.
Angel Investors are another form of business funding or financing. An Angel Investor is an individual which usually funds the business at an early stage with a view to gain royalties or equity ownership. These are individuals with high net worth. As the angel investors take a high risk of investing into startups, they desire for a return of approximately 20% of the capital so invested in the business.
Like Angel investors, Venture Capitalists are also like form of source financing. The Venture Capitalists usually invest in Companies in return for part ownership either in the form of equity or convertible debentures. These are professional managed funds that have huge potentials. The VCs enter into proper contract or agreement determining the terms and conditions of capital investments and repayment process. VCs are good for large businesses looking for high investments. Most of the VCs also act as Nominee Director in the companies in which they invest.
Government Grants & Subsidies
Government has come up with various schemes, grants and subsidies for startups who can get their business plans or proposals approved and get a loan sanctioned against such plans or projects or proposals. If you comply with the eligibility criteria, Government grants as a funding option could be one of the best. You just need to make yourself aware of the various Government initiatives. Some of the Scheme are:
1. Pradhan Mantri MUDRA Yojana for SME loans upto Rs. 10 lakhs.
2. Atmanirbhar Bharat package to fight covid-19 situation
3. MSME government business loan upto Rs. 1Crore in 59 minutes.
4. National Small Industries Corporation aids to promote the growth of MSMEs.
Such other schemes as may be introduced by the government of India
Equity Finance as the name suggests means raising capital by way of issue of shares to the public by way of IPOs, FPOs, GDRs, etc. Equity capital is one of the wide used methods of funding a business. The equity shareholders get the opportunity to participate and vote in shareholders meeting on important matters relating to the company. Further, a healthy amount of equity capital is a must for every business in order to maintain healthy financial ratios, operate efficiently and raise other types of funding when required.
Same like equity, raising capital by way of issue of preference shares is also another form of business finance. The preference shareholders enjoy priority over dividend and profits of the company before the equity shareholders. The company can issue redeemable preference shares which can be redeemed within 20years.
Debt finance means funding either by way of debenture or bonds issue to the investors. Debentures provide long-term funding for a company in the form of debt. Most of the financers opt for debt finance. Through Debt financing the financers keep themselves safe from any defaults or failure in repayment of the loan amount. They carry fixed rate of interest and a fixed tenure of loan repayment.
The Companies Act, 2013 has introduced acceptance of deposits from members or shareholder or directors of the Company without much compliance requirements. Where the owners are not willing to dilute their equity stake, they may opt for accepting deposits from members or shareholders and even general public at large. Deposits from public at large requires proper following of compliances and filing of forms with ROC.
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Disclaimer: This article is written merely for informational purposes and it should not be taken as a legal advice. The readers are advised to consult competent professionals before acting on the basis of any information provided here.