A company may need funds for different purposes and need to decide about the sources from where it could get funds. The nature and size of a company are the important factors that determine the total amount of its financial needs. When a company is growing rapidly, it may need to raise finance from other external sources as its current financial resources may not be adequate to meet its present financial requirements.
If you are thinking to buy-in a business or buy out a business then you cannot fulfill your objectives unless and until you have adequate finance to accomplish your goal. Most of the companies are not capable enough to finance their expansion plans alone. At some point of time, these companies have to rely on external sources for help.
If you want to raise funds for your company then the following methods might help you to achieve your objectives. If you want to raise long term capital or medium term capital then the following options would be best for you.
You Can Take Loans From Financial Institutions
Some of the popular institutions which can sanction you loan are Industrial Credit and Investment Corporation of India, State Level Industrial Development Corporations, Industrial Finance Corporation of India etc. You can get loans from these financial institutions for a period of 25 years but only on one condition and, that is, the project or scheme for which you are taking a loan should be approved. These financial institutions will ask for some form of security against the loan.
You Can Use Public Deposits
You can also ask shareholders, employees and general public to invest their savings in your company. These public deposits will help your company to meet its short-term or medium-term financial needs. Your company can avail some benefits by using public deposits. Some of the benefits of public deposits are:
- Public deposits are unsecured.
- Your company is not required to prove its creditworthiness for securing a loan.
- Your company has to pay low rate of interest while in case of bank loans, the company will have to pay high rate of interest.
- Public deposits are easier method of mobilizing funds than banks.
- You can take loans from commercial banks
Commercial banks give loans to companies who need medium-term loans. It is also a good option for you but in this case also bank will need some form of security for the loan. Banks give funds for renovation and modernization of assets.
Reinvestment Of Profits
If your company has made a profit recently then you can think of transferring a small portion of it to reserves and you can distribute the remaining amount as dividends. This is commonly known as reinvestment of profits. These retained profits are a part of ownership capital since the real owners of these profits are shareholders of your company. You may utilize these reserves for the following purposes:
- You can use them for redemption of old debts.
- You can use them to replace obsolete assets of your company.
- You can use these reserves to meet working capital requirement.
- You can use them to expand the undertaking.
You will be pleased to know that there are several benefits of using this source of finance.
- It will help your company to adopt a stable dividend policy.
- You will not have to depend on external sources of finance.
- Your company will be better equipped to handle difficult situations.
- The creditworthiness of your company will increase.
You Can Issue Debentures
If you want to meet long term requirements of your company then debenture is a good way to raise funds for your company. Debentures have a fixed rate of interest at the time of issue. But you have to pay interest to investors whether or not your company makes profits.
You Can Issue Shares
Equity shares and preference shares are the two types of shares. You have to pay dividend on preference shares to the shareholders only when your company makes a profit. The rate of dividend on equity shares will depend upon the profit your company makes and discretion of your company’s directors. To meet short term requirements of your company, you can try the following methods:
Discounting Bills Of Exchange
This method is commonly used to raise short term finance of a company. Your company can discount the bills of exchange with commercial banks on payment of a bank discount. The discounted amounts will be deducted from the value of bills.
Bank Overdraft And Cash Credit
In cash credit facility, commercial bank allows the company to draw money whenever it requires within a specified limit. But the company has to give security to the commercial bank either in the form of goods in stock or other marketable instruments. In bank overdraft facility, the bank allows the company to overdraw money from its current deposit account up to a certain limit. The bank will grant you overdraft facility against your company’s securities. But you should be aware of the fact that you have to pay high rate of interest on these two facilities.
Your company can give the responsibility of collecting its debtor’s balance to the bank by paying specified charges as per the bank’s rules. This method is known as factoring.
Some suppliers grant credit to companies which purchase store and spare parts and raw materials from them. They usually grant credit for the period of 3-6 months. Trade credit is a good method of gaining short term finance for your company. You can get more trade credit when your company observe rise in sale of its products and you have to purchase more raw materials from your suppliers to meet the increasing demands of your customers.
An Important Advice
A company should avoid excessive borrowings to keep its financial risk at an optimal level. The company should prepare a business plan once it realizes that it needs to raise finance from external sources. A business plan will help a company to convince investors and other people to invest their money in it. The company should take special care to update its business plan regularly. The management of the company should be able to clearly communicate its ideas through business plan.