Why Business Needs Finance?
Every business needs Finance both for short term and long term. They may need working capital, or, fixed capital. There are various sources Â of finance and instruments to raise finance. These sources includes shareholders, financial instruments, and financial institutions and so on.
The funds can be collected through various instruments such as equity shares, convertible bonds, non- convertible debentures, fixed deposits, loan agreements, and so on. The finance is needed at various stages and for various purposes like promoting a business, smooth conduct of business activities.
Methods of Raising Finance
1. Public Issue
The company can raise a substantial amount of fixed capital by issue of shares- equity and preference. In India, however, equity shares are more popular as compared to preference shares. Issuing shares requires a long procedure such as approval of prospectus by S.E.B.I., appointment of underwriters, bankers, and registrars to the issue, filing of the prospectus with the registrar of companies, and so on.
2. Rights Issue
A Right issue refers to issuing shares to the existing shareholders of the company through a Letter of Offer made in first instance to the existing shareholders on pro data basis. The shareholders have a choice to forfeit this right partially or fully. The company, then issue this additional capital to public. This is an inexpensive method as underwriting commission, brokerage are very small. Rights issue prevents dilution of control but it may conflict with the broader objective of wider diffusion of share capital.
3. Private Placement of Shares
This is a method of raising funds from a group of financial institutions and others who are ready to invest in the company.
4. Issue of Debentures
There are companies who collect long term funds by issuing debentures- convertible, or, non convertible. Convertible debentures are very popular in the Indian market.
5. Long Term Loans
The company may also obtain long term loans from banks and financial institutions like I.D.B.I., I.C.I.C.I., and so on. The funding of term loans by financial institutions often acts as an inducement for the investors to sub- scribe for the shares of the company. This is, because, the financial institutions study the project report of the company before sanctioning loans. This creates confidence in the investors, and they too, lend money to the company in form of shares, debentures, fixed deposits, and so on.
6. Accumulated Earnings
The Company often resorts to ploughing back of profits that, is, retaining a part of profits instead of distributing the entire amount to shareholders by way of dividend. Such accumulated earnings are very useful at the time of replacements, or, purchases of additional fixed assets.