Equity Funding
Debt Funding
Equity funding can be through various modes such as
- Private Money from PE, VC, Angel, Strategic Investors (Private Placement / Preferential Allotment)
- Public Money (IPO, FPO, Rights Issue)
Some of the above funding avenues / instruments could be used simultaneously for raising fund from domestic as well as overseas markets.
The big advantage of equity financing is that the investor takes all of the risk. If your company fails, you do not have to pay the money back. You will also have more cash available because there are no loan payments periodically. Finally, investors take a long-term view and understand that growing a business takes time.
The downside is large. In order to gain the funding, you will have to dilute your shareholding in favour of the investor. You will have to share your profits and consult with your new partners any time you make decisions affecting the company. The only way to remove investors is to buy them out, but that will likely be more expensive than the money they originally gave you.
- Term Loan
- Working Capital Loan
- Project financing
- Cash Credit
- Buyers Credit etc.
Debt funding can be obtained from Banks, Financial Institutions, Non-Banking Finance Companies (NBFCs). Debt could also be availed from friends, family or other lenders. Even if family members lend for your business, they must charge the minimum interest rate in order to avoid tax.
Key to debt funding is project report and appraisal. Banks / NBFCs appraise the business, business model, projections and project as such based on which credit call is taken. Preparation of project report and background papers for bank finance is critical.Credit Monitoring Appraisal is to be prepared which is crucial for availing debt funding.
The advantages of debt financing are numerous. First, the lender has no control over your business. Once you pay the loan back, your relationship with the financier ends. Next, the interest you pay is tax deductible. Finally, it is easy to forecast expenses because loan payments do not fluctuate.
The downside to debt financing is that it decreases the profitability of your business. The finance cost increases and affects the profitability to great extent. Debt is a bet on your future ability to pay back the loan. Debt is an expense and you have to pay expenses on a regular schedule. This could put a damper on your company's ability to grow.Finally, although business entity that provides some separation between company and personal funds, the lender may still require you to guarantee the loan with your family's financial assets.
