This article is written by Sambavi Marwah, a fourth-year law student, from Delhi Metropolitan Education, GGISPU.
Finding funds is one of the most essential requirements for a business, to begin with. Without appropriate funds, it becomes difficult for the organization to expand and grow. It is essential for the organization to decide their source of funding, whether to go by equity or debt.
Corporations need money or funds to grow and expand in the market. They do so by either asking investors to invest in their business or by using the profits earned so far by the company itself. Financing is the process used by the corporates to raise funds or finance their existing or new projects to develop and face their competitors.
Financing can either take place for short term purposes or long term purposes.
- Short term financing is needed when a corporate requires money for a short term basis, i.e., for one year. It can also be referred to as working capital financing. Short term financing is required to raise funds to pay the wages of the workers, buy raw materials, etc.
- Long term financing is needed when a corporate requires money for a long term basis, i.e., for more than five years. It is also known as fixed capital financing. Long term financing is required to raise funds to start a new business, buy land or machinery, etc.
An organization either raises funds from internal sources or external sources, depending upon their requirements and availability.
- Internal Sources are the internally available sources, i.e., within the company, like owner’s investment, retained earnings, sale of assets, etc.
- External Sources are those sources which help the company to raise its funds outside their business. Sources like equity shares, preference shares, debentures, etc.
The organization must research, study and analyze all the factors and sources before opting for the best possible source to raise the funds.
Main Sources of Funding
Corporations always seek resources to raise funds to expand their business, either by investing in a new line of business or by developing the existing one. It needs a constant flow of money not only to expand but also to meet the daily expenses.
The main external sources used by the corporations are either Equity or Debt.
- Equity funding is used by companies to raise money from the public. It offers a specific number of shares in exchange for the money being invested by the public. A person buying those shares gets ownership rights.
The disadvantage of opting for equity funding is that the company has to share its profits with the shareholders for the long term.
- Debt funding is when a company obtains loans from the banks. It also includes debentures, leases and mortgages. When the company opts for debt funding, it has to face the demerit of paying an extra value (interest) time to time to the banks.
Sometimes when a company is unable to opt for external sources to raise money, they go for the internal sources available to them, which can be in the form of retained earnings or sale of an asset.
- Retained earning is the amount left with the company after paying the dividends to the shareholders. The company retains the left out amount for any future emergencies. Using retained earnings can be a drawback as it is not very cost-effective
- Sale of an asset is when a company sells off any of its assets and the cash generated by the sale is used internally to meet the necessary expenses.
Hence, it can be seen that there are several solutions available to the corporation to raise the funds or expand their business.
As we already read above the corporations raise capital either through equity or debt to grow their operations.
Corporate funding is a low-cost alternative to debt or equity for financing the business.
Thus it comprises of:
- Tax incentives
Tax incentives or tax concessions are the benefits provided to the corporations to expand and grow their business in the market. These are the relief given by the government to the corporations so that they can easily invest and raise funds for its growth.
- Zero-interest loans
Zero-interest loans are the ones where the corporation has to pay only the principal amount and no interest is charged upon it, provided the whole amount is paid within the prescribed time. Failure to comply with the date, penalties can be levied on the corporation. This type of loan helps the company to save money.
Startups and small businesses often require help from large corporations to give them a kick start to enter into the market. These large corporations then offer corporate grants to these small businesses to help them with their capital requirement.
Grants are non-refundable and carry a high rate of interest.
Fundraisers are those events organized by the corporates to help them to raise the capital amount. Fundraisers can be in the form profit donation, charities, etc.
The laws which cover the aspect of corporate funding are:
- The Companies Act 2013
- Securities and Exchange Board of India Act, 1992
- The Securities contract (regulation) act, 1957
- Depositories Act, 1996
- Foreign Exchange Management Act, 1996
- Reserve Bank of India Act, 1934
These laws provide the basis and certain grounds for the companies to follow while sourcing the finance. A company needs to abide by the laws while taking the decision related to every financial or non-financial activity.
As it is correctly said, “Plans are nothing, planning is everything”. Without effective planning of the raising of funds, a company cannot achieve its desired goals on time as the foremost requirement for a business to flourish is the capital money. To start a business, the first and the most essential element for a company is to collect money and invest it towards the building up of its business.
A company can opt either for the internal sources or the external sources to raise capital for the expansion. Sometimes companies go for both the solutions in order to collect the funds as, without it, no business can flourish in the market with other competitors already present.
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