Updated on: Sep 29th, 2022
5 min read
Funding is an essential aspect of any business/company. Entrepreneurs require funds to grow their businesses/companies. An entrepreneur’s primary responsibility is arranging funds for the business. A well-funded business grows fast, while a poorly funded business faces financial challenges. The types of funding entrepreneurs can take for their businesses are listed below.
Equity funding means the company owner relinquishes a part of their ownership in exchange for the funds. It also includes borrowing from friends and family and may extend to Initial Public Offering (IPO). The business owner has to give up a stake in their company, thus resulting in the sale of a portion of a company’s equity in return for capital. Equity investors usually prefer to be involved in the company’s decision-making process.
Preference share capital is a kind of equity funding where the investor receives a fixed return known as a dividend. Companies issue preference shares to raise capital. It often mandates a fixed dividend to be given to shareholders yearly for each preferred stock. Shareholders usually redeem the preference shares after the lapse of the agreed time and receive bulk payment. The Companies Act 2013 provides that all preference shares should be redeemed within 20 years. However, these shareholders do not have a voting right in the company.
A debenture is an instrument executed by a company acknowledging indebtedness to some entity or person to secure funds. They provide long-term funding for a company in the form of debt. A company can issue debentures to raise funds when permitted by its Articles of Association (AOA). Usually, the debentures of a company are unsecured. However, they pay an interest rate and are repayable or redeemable on a fixed date.
Companies can always approach a bank or financial institution to obtain a loan. Loans from banks are a conventional funding option for companies and businesses. Various banks offer business/corporate loans for different business needs, such as equipment loans, term loans, working capital loans, asset-backed loans for research and development, etc. The interest rate and the loan terms may also vary from one bank to another. Some banks might require collateral for a loan, while some loan schemes may not require collateral.
The Government of India launched the ‘Startup India’ programme, which provides grants to startups. This programme offers grants like income tax exemption, self-certification under labour and environmental laws and an 80% rebate in filing patent applications. The government launched the ‘Startup India Seed Fund Scheme’ last year, which gives funding support to early-stage startups. The government also started the ‘MUDRA’ loan scheme, providing collateral-free loans for micro, small and medium enterprises. Apart from that, the government provides many subsidies and grants to companies in the technological areas and industries in rural areas.
External Commercial Borrowing (ECB) is a debt or loan from a foreign entity. ECB could be commercial loans, buyers’ credit, suppliers’ credit, or other forms of funding provided by a supplier, foreign financial institution, or investor. In India, companies can raise funding through ECBs for various applications, including new projects, import of capital goods, modernisation of existing projects, etc. In India, ECBs are approved under the approval or automatic route, similar to Foreign Direct Investment (FDI).
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