Capital and Fund Raising

Once all the legal formalities are done with, the next step is to ascertain the resources as well as quantum of funding for the commencement of business operations. Keeping into mind the scale of business and in-hand funds already possessed by the promoters of business entity, the type of capital and debt structure shall be designed before approaching the funding authorities.

What to Finance?

There may exist multiple requirements for commencing or running a business entity. The major events that require a 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.

  1. Writing off the liabilities of business

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

  1. Working Capital Requirements

        Funds are also required to run 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.

  1. Expansion of business

        In order to expand the business, there is again 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.

  1. Merger/Demerger/Buyout

        The transactions like 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.

       Establishment of any new project

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



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