Various Methods of Raising Capital
There are several reasons for which a company raises funds ranging from short to long periods. The fiscal need of a company depends largely on the size and nature of a business. The fund raising scope of an organisation relies on the sources which are available. The sole proprietorship and partnership have limited prospects for raising fund. One can finance his business via following ways:
- Borrowing from fiscal companies
- Advances from financial institutions and commercial banks
- Raising loan from known people
- Investment out of own savings
Companies can raise capital or finance through several methods. In order to raise mid-term or long term capital, you have the following alternatives:
Issuing of Shares
The first and most crucial method is issue of shares. The shareholders liability is restricted to the face value of shares owned by him, which are easily transferable. They are of two types:
Equity shares: the dividend rate on the Equity shares depends on the profits made out of the issue. Thus, there is no burden on the company. Every share holds one voting right.
Preference Shares: the dividend is payable at a fixed rate and is only payable when the company earns profit. Thus, there is no burden on the finance of the company. It comes without voting rights.
Issue of Debentures
Companies usually have the liberty to borrow and raise finance via the loan taken by issuing debentures. The interest rate of debentures is fixed while it is being issued and is recovered by a charge on the company’s assets, serving as a collateral security for the paid amount. The company has to pay the interest despite of profit or loss. Debentures are issued to finance the permanent long term requisition of business and they don’t hold any voting rights.
Loans from Fiscal Institutes
Medium term and long term loans can be obtained from fiscal companies like IFCI, ICICI, SIDC and other commercial institutes. The banks and financial institutes offer loans for a period of 25 years against proven projects. The loan amount sanctioned is covered by the mortgage securities of the company, against stock, gold or shares.
Loan from Commercial Bank
Loan for medium term are raised from commercial banks and secured by company’s assets or properties. Usually it includes modernisation and renovation of assets and thus is borrowed from banks.
Companies also raise finance by sending invites to employees, shareholders and public to deposit their extra savings in the company. As per the Companies Act, a lock-in period of 3 years is allowed. It accounts to short term or medium term fiscal need. The increase in public deposits is because they
- Are unsecured
- Charge lower rate of interest in comparison to bank loan interest
- Don’t require credit score for securing the loan amount
- Can easily be mobilised
Reinvestment of Profits
Profit making companies don’t distribute the complete profit amount as interest or dividend but transfer some to reserves. It is called ploughing back o profit. These reserves help the company to work in different segments without going for any loans:
- Expansion of the company
- Replacement of depreciated assets
- Meeting the working capital requirement
- Redemption of previous debts
Thus, by using these means one can easily raise finance for his company!!
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