Ever thought of starting your own business? It can be a troubling task to look for funds or finances because it’s the fuel that keeps running your business engine. For a company to succeed, it requires steady financial support from the market. Without funds, it cannot survive for long, especially for start-ups. There are many options out there in the market from where you can avail funds for your start-up, but which one to opt from available options would become a challenging and tricky choice. Here, we will break down financial options available to your start-up and alternative lending options from where you can avail funds.
The most favoured form of business is to get the private limited company registration in India; it offers two types of ways by which you can raise funds for your start-up. As listed below:
• Equity finance
- Points to keep in mind here,
• A private limited company cannot exceed the limit of issuing shares to more than 200 shareholders.
•Those who have equity shares will have ownership sharing as well.
•Shareholders will be entitled to voting rights and, by that means, will be working on par for the company’s management and controlling.
Categories of Equity Finances:
1. Private Placement
Providing shares to choose a small group of persons.
• The Board of directors of the company has to choose 50 groups of persons, not to extend beyond that in a financial year.
• The amount of money received has to be other than cash.
• Investors will not possess any right to renunciation.
• Once the date of receipt of application money is issued, shares have to be allocated within the time duration of 60 days; the company would have to repay it 15 days beyond the completion of 60 days.
• If the company fails to repay the liable amount within the duration, it must be paid along with a 12% annual interest.
• Within 15 days, the company has to file the return of allocation with the MCA from the allocation date.
•Until and unless the return of allotment is filed with MCA, the company cannot utilize money.
- ESOP - these are the type of equity shares issued to company employees and directors at a discount for giving their expertise or giving IPR (intellectual property rights) or providing value addition.
- Debt financing provides the opportunity to borrow funds from a bank or other financial institutions or instruments.
Key points –
The company’s MOA and AOA define
• Borrowing powers of directors.
• Debt can be secured or unsecured by the assets of the company.
• Fixed interest sum must be paid on it.
- Bank loans
• Usually, it is the preferred way for financing for start-ups.
• It can be availed with or without collateral.
• Overdraft or credit or guarantee facilities are available to avail for company from the bank.
• By getting prior approval from the general meeting, the company can issue convertible debentures into shares.
• Not every company possesses the right to issue debentures using voting rights.
• To provide the interest payment, a company has to generate a debenture redemption reserve account.
• There is a limit of 10 years, which should not exceed for any redemption of secured debentures.
• If the company comes under the given criteria of specified law, it is obligatory to nominate a debenture trustee.
Exemptions are there for individual companies to issue debentures with redemption.
• period exceeding the limit from 10 years to 30 years as listed below:
- Those companies which are dealing with the activities of infrastructure projects.
- Infrastructure financial company.
- NBFC (non-banking financial companies) with infrastructure debt.
Companies with approval from a statutory authority such as central government or national housing bank or RBI.
Branding for business is not just limited to getting the trademark registration in India. Failing to pay interest on debentures can hamper your brand. If the company fails to pay interest or redeem debentures, it will mean that all debenture holders can apply to the tribunal for pronouncing a redemption of debentures order. That would lead to the payment of interest and punishment to every defaulting officer with fine and imprisonment.
2.Partnership firm and Limited Liability Partnership
Generally, there are two ways to do so to raise funds for start-ups.
•Capital from associates
- Contribution made by associates to capital at the time of incorporation of the company.
- Once the incorporation is done, associates can bring in supplementary capital for enhancing its limit.
- To increase capital, an LLP and partnership firms will have to amend partnership deed. This can be done in two ways: payment of additional stamp duty and authorizing supplementary act.
- To meet its capital necessity, a firm can also bring in new associates.
- As per the deed clause of financial assistance, LLP and partnership firm can borrow loans from any bank and other financially viable institutions.
- When there’s the non-existence of such laws, it shall be supervised as per the LLP Act and Partnership act.
• Proprietorship Firm
Such types of firms can self-finance themselves by borrowing loans from the bank and other financial institutions. There are many different ways by which a firm can meet its daily capital requirements without giving any collateral securities to avail funds.
Such as trade credit to purchase goods and raw materials. If you explore the market, it provides multiple ways to avail funds for your start-up other than the list above. Like, community development finance institution (CDFI) which provides funds to small businesses. Venture capitalists give capital to your firm with quid pro quo of ownership sharing. Angel investors are becoming very predominant in the market and are usually very keen to invest in start-ups or sunrise industries. Crowdfunding is also becoming popular among start-ups, it allows you to fetch small investors from various strata for your firm.
Debt and equity can be a primary way to avail funds for start-ups. It takes a huge amount of time and resources to find the finance for your start-up initially. Because finance is the basic and fundamental requirement for any business, it is difficult and could also become the question of its survival for any business to sustain without it.
Lastly, as Casey Berman has said, “raising money from people is a very difficult thing, you just have to sort of roll with it and be aware that there were a lot of companies that were initially rejected that became generation-defining companies. Hence, keep on grinding before giving up.