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When you think about doing any business, the first thing that comes in mind apart from a business idea is the need for finance i.e. money available to spend on business needs. Once the business grows there would be certainly greater demand for more money to finance the expansion of the business. The day to day running of business also needs money.
Manthan team is fully committed to guiding in choosing you the Right Source of Finance and will Act as a mediator between investors and you.
There are two main types of business finance i.e. Equity finance and Debt finance. Broadly speaking, Equity financing is capital exchanged for part ownership/shares in the company, and Debt financing is funds borrowed from a moneylender and repaid with interest.
What is Debt Funding?
Debt funding is the process in which an investor lends money to an entrepreneur for their business needs for a certain period at a given rate of interest. The startup has to pay the debt fund back on a pre-scheduled date along with the interest payment.
Interest is a pretty high rate in case of startups, to compensate for the risk of business failure and the business loan is provided against the company or startup’s assets as debt securities. So, in case of non-repayment, business failure, or bankruptcy of the startup, the investor or the bank can recover money by seizing assets.
Major Options Available in Debt Funding
Loan From Banks
Banks grant loans, which can be used for various business needs like the purchase of inventory and equipment, operating capital (working capital) and fund requirement for expansion, etc. By providing loans banks become business frontrunners and not owners, unlike VCs and angels
Loan From NBFCs
Non-Banking Financing Companies(NBFCs) also grants loans like banks and becomes business frontrunners but not owners. Sometimes it is comparatively easy to get a loan from NBFCs as compared to banks with a lower rate of interest
Loans can also be obtained from moneylenders on interest. In this type of funding, interest rates are comparatively higher. Major Drawback of funding option in form of loan from banks/NBFCs etc. is interest on such loan which has to be paid periodically irrespective of the fact that there is loss or profit.
External Commercial Borrowings are loans in India made by non-resident lenders in foreign currency to Indian borrowers which mainly includes commercial bank loans, buyers’ credit, suppliers’ credit, securitized instruments such as Floating Rate Notes and Fixed Rate Bonds, etc., credit from official export credit agencies and commercial borrowings from Multilateral Financial Institutions.
CGTMSE provides a guarantee to lending institutions up to a certain limit for all lending done by them to the MSME sector. This initiative allows banks and other lending institutions to provide funds to first-generation entrepreneurs without the need for collateral/security or third party guarantees.
Venture debt is a type of debt financing provided to venture-backed companies by specialized banks or non-bank lenders to fund working capital or capital expenses, such as purchasing equipment. Venture debt can complement venture capital and provide value to fast-growing companies and their investors.
What is Equity Financing?
Equity Financing, on the other hand, doesn’t require the startup to pay back the money invested. However, equity funding requires the startup to part with a large piece of equity, which the investor acquires against the funding they provide and this gives them ownership and a place in the board of directors of the startup which means they would take part in business decisions they shall contribute to business capital, share risk and participate in profit sharing.
This is where debt fund differs; here, the investor only gets the loan repaid with interest and therefore has no right to interfere in the business. Thus, the founder can freely run their startup the way they like.
Major Options Available in Equity Financing
An angel Investor an individual who provides capital for a business start-up. They are usually High Net worth Individuals who usually give support to start-ups at the initial stage, where risks of the start-ups failing are relatively high and when most investors are not ready to invest in such start-ups. Generally, Angel Investors provides capital to start-ups in exchange for convertible debt or ownership equity. The number of angel investors has greatly increased in India, lately.
Venture Capitalist (VC) / Private Equity
Venture Capital is a form of private equity financing that is provided by venture capital firms to start-ups, early-stage, and emerging companies that have been deemed to have high growth potential or which have demonstrated high growth. Venture Capital firms or funds invest in these early-stage companies in exchange for equity, or an ownership stake, in those companies. Venture Capitalists take on the risk of financing risky start-ups in the hopes that some of the firms they support will become successful. Usually, Venture Capital investment occurs after an initial “seed funding” round. VCs usually prefer convertible instruments, which include compulsory convertible preference shares and compulsorily convertible debentures
Manthan will guide you in choosing between Debt or equity or its best ratio, for which analysis of various factors would be required such as:
- Amount of money required
- How quickly the money is needed
- The cheapest Option Available
- The amount of risk involved in the reason for the cash
- The length of time of requirement for finance.