Types of Business Funding :

• Debt

Debt Funding, also known as debt financing or debt lending, is a method for businesses to raise capital by borrowing. The borrowed funds are typically repaid at a predetermined future date, often through regular payments that include accrued interest.

• Equity

Equity finance involves issuing new shares in exchange for a cash investment. Your business receives the necessary funds, and in return, the investor becomes a shareholder in your company. This arrangement means the investor stands to gain from the success of your business.

• Convertible Securities

Convertible securities refer to financial instruments that have the option to be converted into other types of securities. For instance, debenture holders have the ability to convert their securities into equity. This conversion typically occurs during the time of liquidation.

Sources of Business Finance

Boot strapping: 

In the start-up context, bootstrapping is the method of initiating and expanding a business without taking external financial help or capital. This approach encompass building the business from the ground up, utilizing personal savings and existing resources rather than relying on investors or loans.

Seed Funding:

Seed funding is a form of financial support that businessmen secure after identifying the market fit for their business. This funding is typically exchanged for equity and is given by private investors to founders who may not be able to self-finance their ventures. Seed funding is commonly sourced from wealthy individuals, angel investors, as well as friends and family.

Retained Earnings:

Retained earnings means the share of a company’s net income that remains after paying dividends to shareholders. Retained earnings enable a business to fund its operations without borrowing loans or issuing additional equity in the market. This internal source of capital provides financial flexibility for business activities and expansion.

Debt Financing:

Debt financing, in the form of loans, may have short-term or long-term repayment schedules. Typically, short-term debt is employed for funding current activities such as operations, while long-term debt is utilized for financing assets like buildings and equipment.

Traditional Bank Finance:

Traditional bank Finance is a type of loans offered by conventional banks and lenders. This form of debt financing is widely used by small and mid-sized companies. Traditional financing typically provides the most favourable rates and terms among various commercial lending options.

Project Finance:

Project finance is the provision of funding for long-term projects, such as infrastructure, industrial initiatives, and public services, using a financial structure marked by non-recourse or limited recourse. In this framework, the repayment of the debt and equity used to fund the project is done from the cash flow generated by the project itself. Discuss your business ideas or plans with our experts and we will make project finance and feasibility report for you to get seamlessly from Banks and Financial Institutions.

Working Capital Finance:

Working Capital Financing occurs when a business borrows funds to process daily operations and cover payroll, rather than for the acquisition of equipment or investments. This type of financing is typical for businesses facing irregular cash flow.

CGTMSE Credit – Unsecured finances by banks:

The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) is a initiative of Government of India. Its purpose is to stimulate the flow of institutional credit to Micro & Small Enterprises (MSEs). The Credit Guarantee Scheme (CGS) was introduced to enhance the credit delivery system, promote credit flow to the MSE sector, and broaden access to finance for underserved and underprivileged segments. This initiative aims to make conventional lenders’ financial resources available to new-generation entrepreneurs.

Export finance:

Export finance means providing funding to exporters, supporting their global business. In other words, it serves as a cash flow solution for exporters, addressing production and other international transaction needs, including working capital. International business entities seek export finance to ensure the affordability of producing goods and secure timely payments when shipping products to another country.

Issue to Debentures

A debenture is a tradable financial instrument that businesses can issue to get long-term finance without the necessity of providing collateral or diluting their equity.

Issue of Preference shares

Preference shares are issued to raise capital for the company, it is called preference share capital. In the event of the company facing losses and undergoing liquidation, the final payments are prioritized for preference shareholders before disbursing funds to equity shareholders.

Issue of convertible notes

A convertible note is initially structured as a debt investment but includes a provision enabling the conversion of the principal amount including interest into an equity investment at a later date. This facilitates a quicker initial investment with reduced legal fees for the company, while ultimately providing investors with the economic exposure characteristic of an equity investment.

Equity Finance

Equity financing is the selling company shares to raise capital, in exchange of ownership of the company. This term encompasses the sale of various equity instruments, including common stock, preferred shares, share warrants, and other similar securities.

Seed funding

Seed funding refers providing financial support to a business at its initial stage in the business cycle. This commonly happens during the formation of the business, at the idea stage, when there is only a plan, prototype, or the business is in a trial phase, often with minimal or no customers. The risk associated with seed funding is notably high.

Angel Investors

Angel investors are individuals and businesses that are keen on supporting the survival and growth of small businesses. While their objectives may extend beyond mere economic returns, including a mission-focused approach, angel investors still prioritize profitability and security for their investments. Consequently, they may impose similar demands on the businesses they invest in as venture capitalists, aligning their interests with both the financial success and the broader goals of the supported enterprises.

Venture Capital

Venture capital (VC) is a financing model in which capital is invested into a company, typically a startup or small business, in exchange for equity in that company. To facilitate investments, VC firms appoint general partners (GPs) responsible for raising funds from investors referred to as limited partners (LPs). The success of both the GP’s firm and the LP is tied to the performance of the invested company.

Businesses leverage the capital infused by VC for various purposes, such as expanding their teams, diversifying their offerings, or achieving specific profitability milestones. Venture capital operates within the broader and more intricate landscape of the financial markets, specifically categorized as part of the private markets.

SME IPO

SME IPOs are meant to raise capital for Small & Medium Enterprises Companies. SME IPOs typically have a smaller issue size than regular company IPOs. After an SME’s IPO, these companies are not listed on the Bombay Stock Exchange or the National Stock Exchange due to their size.

Initial Public Offerings (IPOs)

Initial Public Offerings (IPOs) are typically used by companies with established profitability, management stability, and a massive demand for their products or services. This phase is often reached after several years of business operations. In the lead-up to an IPO, companies commonly raise funds privately through one or more rounds of financing. This private fundraising enables them to strengthen their operations, build a solid foundation, and demonstrate their viability in the market before making the transition to public ownership through an IPO.

Click here to know more.