For any business to be successful, it should have adequate supply of finances. This is especially true in case of growing countries like India. Businesses that are well-nourished economically operate efficiently and they are the ones that take advantage of the market during opportune moments. Those firms that are economically malnourished are the ones that are unfit for carrying out their business processes efficiently even in the presence of favourable market conditions.
So it is important for any business to have a proper flow of finances at regular intervals. Any entrepreneur should make an in-depth analysis before opting for additional finance.
This can be done in the following manner:
Determine the purpose of fund
This is the most important step. The entrepreneur should decide on the purpose for which funds are required, whether it is for expansion or working capital or any other reason. On the basis of this we can opt for financing through debt or equity.
Selecting the right type of fund
There are many types of funds available for a business viz debt, equity, venture capital, etc. The favourites being debt and equity. Small business owners who seek financing face a fundamental choice: should they borrow funds or take new investment capital? Since debt and equity are accounted for differently, the impact of financing on earnings, cash flows and taxes shall affect the choice of financing.
This type of finance is opted for in cases where there is a definite time frame involved. Debt is accounted for as a liability of the business which attracts interest and timely repayments. The interest portion can be claimed as deductible business expense. Although many feel that debt is expensive, yet it is equity which is the most expensive source of funding as it carries with itself higher risk. Further the entrepreneur has to plan cash flows for making the scheduled principal repayments along with interest.
Debt financing is used to fund a specific project or to meet the working capital requirements or to source expansion plans. It can be bifurcated into short term or long term depending on the purpose for which finance is required.
Equity represents an ownership stake in the business. When you finance through equity, you tend to give up a certain portion of your ownership interest in the form of shares, in exchange of cash. The investors receive remuneration in the form of dividend or a share in the annual profits. Though equity seems cheaper as compared to debt, it may prove expensive to the business owner since constant dilution of ownership interest may lead to possible loss of control. Financing in the form of Equity is opted for in cases where the gestation period of returns is long i.e if the business owner feels that profits are going to take some time.
Determining the quantum of finance
This is again an important factor that a business owner should consider before acquiring finance. The amount of finance should be determined after taking into account the facts and figures of the project. Further one should not ignore the impact of the finance on future cash flows and earnings. Suppose we require 10 lacs additional finance but we make a rough estimation and take a loan of say 13 lacs. So the extra 3 lacs will require unnecessary interest payment and will pinch your cash flows and profits. On the contrary if we take a loan of a lower amount say 8 lacs, it will again take a toll on the cash flows as you may not be able to make the appropriate payments due to lack of funds.
A good business plan and good potential returns is the key to attract investors. Many businesses either work without a business plan or have a plan with many inherent flaws. Our team of professionals shall closely analyze your business operations and prepare an investor ready business plan. Preparing a business plan would help in clarifying the company’s direction. The next step would be addressing upon the four crucial issues:
- Purpose – Do you have a genuine purpose or a good business idea in case of start-ups?
- Marketability – Does your idea have a substantial market?
- Management- Does your team have the ability to lead the company to profits?
- Cash Flow – Does your company have an efficient cash flow system?
Based on the above, our experts will provide a clear picture of the right quantum of finance and the right type of finance.
Assuming the role of business consultants our team will now expose you to the different forms of financing available. They will help in selecting the right type of financing for the business taking into account the effect of finance on the cash flows and future profits. The following are the options for business funding:-
* Debt and equity have been explained earlier
Business Angels/ Angel Investors
These are high net worth individuals who provide finance in return of shareholding in the business. They may take up an active role in the management as well.
These are similar to business angels, only that finance is provided by venture capital company. The company manages funds on behalf of their investors and shareholders. For finance through this route the following are essential:
- A strong business plan/proposition.
- Good potential returns.
- Clear exit route for the venture capital company within a timeframe of 3-5 years.
Venture capital financing is suitable for businesses looking out for a high amount of finance.
This is a combination of debt and equity. The lender gets an option of converting the loan into equity stake of the business. The loan in this case generally attracts a higher rate of interest as compared to loan from other financial institution.
This is an arrangement whereby the business sells its accounts receivables to the factoring company at a discount. The business gets immediate finance resulting in improved cash flow. The factor then collects the outstanding amount from the business customers.
This service involves acquiring finance for the business. This can be done by approaching banks, financial institutions, angel investors, venture capital companies and other agencies.