Types of Funding for Business
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 Articles of Association of the Company.
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.
