Types of Funding for Business

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.

Equity Capital

Equity capital is one of the wide 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. A equity holders right in the company is established through shares, with each share representing a part ownership 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.

Preference Share Capital

Preference share capital is a type of equity funding which provides the investor with fixed returns. Preference share capital or preferred shares often mandate a fixed dividend to be provided every year for each of the preferred stock, 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.

Business Bank Loans

Business bank loans are among the easiest to obtain form 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. To know more about bank loans, refer to the following articles:

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. Debentures 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 Certificate of Commencement of Business, if permitted by the 1.

External Commercial Borrowing

External Commercial Borrowing or ECB is a loan or debt funding raised from a foreign entity. External commercial borrowing could be commercial loans, buyers credit, suppliers 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 application including import of capital goods, new projects, modernization of existing projects, etc., ECB in India are approved under the automatic route or approval route, similar to Foreign Direct Investment in India.

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Frequently Asked Questions

Common questions about Business Funding Types in India: Equity, Loans & More.

The article discusses several types of funding options available for businesses in India, including equity capital, preference share capital, business bank loans, debentures, and external commercial borrowing (ECB). Each of these funding sources has its own characteristics, advantages, and considerations.

Equity capital is one of the widely used methods of funding a business. It involves issuing shares to investors, who then become partial owners of the company. Equity capital is considered one of the safest and most sought-after forms of funding, although it can be costly. A healthy amount of equity capital is essential for maintaining healthy financial ratios, operating efficiently, and raising other types of funding when required.

Preference share capital is a type of equity funding that provides investors with fixed returns. Unlike regular equity shares, preference shares often mandate a fixed dividend to be paid every year, exhibiting a nature similar to that of a bank loan. After an agreed-upon time, preference shares are usually redeemed, providing the investor with a bulk payment.

The article states that business bank loans are among the easiest forms of funding for a business to obtain. Banks have well-structured processes for providing credit facilities to startups and existing businesses, making bank loans a viable proposition for entrepreneurs seeking funding.

Debentures are instruments issued by a company, acknowledging indebtedness to a person or entity to secure funds. They provide long-term funding for a company in the form of debt. Debentures can be classified as secured or unsecured, and they can usually be issued by a company after obtaining a Certificate of Commencement of Business, if permitted by the company's Articles of Association.

External commercial borrowing (ECB) is a loan or debt funding raised from a foreign entity, such as a foreign financial institution, supplier, or investor in the company. ECBs can be raised by businesses in India for various purposes, including importing capital goods, financing new projects, and modernizing existing projects.

Equity capital is considered one of the safest and most sought-after forms of funding for businesses. It helps maintain healthy financial ratios, enables efficient operations, and provides a foundation for raising other types of funding when needed. Additionally, equity shareholders have the prospect of sharing in the company's profits through dividends or share value appreciation.

Preference shares can be redeemed either in a lump sum or in tranches, making the funding structure similar to that of a loan. According to the Companies Act, 2013, all preference shares must be redeemed within 20 years.

The article states that debentures can usually be issued by a company after obtaining a Certificate of Commencement of Business, if permitted by the company's Articles of Association.

The article mentions that external commercial borrowing (ECB) in India can take various forms, including commercial loans, buyers' credit, suppliers' credit, and other forms of funding provided by foreign financial institutions, suppliers, or investors in the company.