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Capital and Fund Raising

After incorporation of a company, LLP, startups, or any other form of a legal entity, the next step is to ascertain the resources as well as quantum of funding for the commencement of business and its operations. Keeping into mind the scale of business and in-hand funds already possessed by the promoters of the business entity, the type of capital and debt structure shall be designed before approaching the funding authorities.

What to Finance?

Money required for commencing the business entity. The major events that require substantial funding are as follows:

1. Procurement of assets for business

Before commencing any business, various assets are required to be acquired first such as land, machinery, computers, stock, working capital, furniture & fixtures etc. for which funds are required. Generally, personal savings of promoters or loans from relatives or friends are used to finance small assets. However, for acquiring land or machinery, huge funds are required which can be financed through issuing equity, debentures, crown-funding, loan by banks, etc.

2. Writing off the liabilities of business

        To pay off the debts of the business, funds are required. For instance, in order to lessen the outstanding loan amount, companies through initial public offering or rights issues, generate funds from the public to pay to the banks so as to reduce the burden of interest.

3. Working Capital Requirements

        Funds are also required to run the day to day operations of a business entity. For instance, to pay off salaries to employees, to pay off electricity bills, water bills, companies generally approach banks to grant working capital loans.

4. Expansion of business

        In order to expand the business, there is again the necessity of funds. The funds are required to establish new plant and machinery, employ more workforce, etc. No business can expand without the infusion of funds. For such purpose, funds are raised through bringing out IPO, FPO, Rights Issue, etc.

5. Merger/Demerger/Buyout

        The transactions like a merger, demerger, buyout, etc. are highly complex transactions. In a merger, the transferor company has to pay to the shareholders of the transferee company for which it will need funds. Such requirement is fulfilled by taking up loans from a bank or consortium of banks due to it being a highly expensive exercise.

6. Establishment of any new project

        To undertake any new project, for example, the construction of a new highway by an infrastructure company, and to finance such a huge project, the companies go for the issue of infrastructural bonds with a lock-in period because such a project shall have a long gestation period before it realizes a profit.

 

Therefore, the exercise of fund raising is a highly intelligent exercise and it depends upon various factors so as come out with a feasible and suitable funding option.

How to Finance?

Funding the business is one of the primary responsibilities of an Entrepreneur. Well-funded businesses usually grow faster backed by motivated employees, happy customers, and satisfied creditors. Whereas a poorly funded business will be plagued by operational and financial difficulty. Therefore, funding is of paramount importance in running a successful business. In this article, we look at the types of funding available for businesses in India.

1. Equity Capital

Equity capital is one of the widely used methods of funding a business. Funds infused as equity share capital are classified as “Paid-up Capital” when shares have been issued to the investor or “Share Application Money” when share allotment for the investor is pending. An equity holder’s right in the company is established through shares, with each share representing a part owner of the company. Equity shareholders are allowed to participate and vote in the shareholder’s meeting along with the prospects of sharing the profits of the company through dividends or share value appreciation. Equity capital is one of the safest and most sought after forms of funding, while also being the costliest. 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

2. Preference Share Capital

Preference share capital is a type of equity funding that provides the investor with fixed returns.  share capital or preferred shares often mandate a fixed dividend to be provided every year for each of the preferred stocks, thereby exhibiting a nature similar to that of a bank loan. After the elapse of time as agreed between the investor and company, preference shares are usually redeemed to provide the investor with a bulk payment at the end. Preference share capital can also be redeemed in trances to make the funding structure similar to that of a loan. Companies Act, 2013 mandates that all preference shares be redeemed within 20 years.

3. Bank Loan

Bank loans are among the easiest to obtain forms of funding for a business. Banks have well-structured processes for providing credit facilities to startups and existing businesses and fund a large number of businesses across the country. Therefore, it is important for all entrepreneurs to consider business loans as a viable proposition and talk to the Bankers first when funds are required.

4. Debentures

A debenture is an instrument executed by the company under its common seal acknowledging indebtedness to some person or entity to secure the funds, and provide long-term funding for a company in the form of debt. Debentures can be classified into secured debentures or un-secured debentures. Debentures can usually be issued by a company after obtaining a Certificate of Commencement of Business if permitted by the Articles of Association of the Company.

5. External Commercial Borrowing

External Commercial Borrowing (ECB) is a loan or debt funding raised from a foreign entity. commercial borrowing could be commercial loans, buyer’s credit, supplier’s credit, and/or other forms of funding provided by a foreign financial institution or supplier or investor in the Company. ECBs can be raised by businesses in India for a wide range of applications including import of capital goods, new projects, modernization of existing projects, etc. ECB in India is approved under the automatic route or approval route, similar to Foreign Direct Investment in India.

6. International Funding

Funding is not only limited to the Domestic markets; with liberalization and globalization, a business enterprise has an option to raise capital from international markets also. Foreign Institutional Investments (FII) and Foreign Direct Investments (FDI) route along with American Depository Receipts (ADRs) and Global Depository Receipts (GDRs).

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