26 Sources of Capital – All You Need to Know

26 Sources of Capital – All You Need to Know

Once upon a time Capital used to be the scarcest available source of the business. Now the talent has taken over the top slot and capital has become abundant. But as it comes with multiple choices, which source and which type of capital is relevant for the business is another challenge. All forms of money are not equal.

“Money is always eager and ready to work for anyone who is ready to employ it.” Idowu Koyenikan

To decide which source of capital to tap knowing all the sources is important. Here I present 26 sources of capital. The list includes equity and debt, both options.

Equity Options

  • Own Savings

This is the 1st source of capital energy entrepreneur usually starts the business with. For small and medium enterprises this is the only source of money which classifies as Owner’s Capital.

Usually, it is saving or liquidation of existing assets/investments.

This money is not returnable.

  • Family Members

The next used source of capital is money from family members.  This is easier to access and could remain with the enterprise for the long term.

  • Friends and Relatives

This could be the source when the enterprise is not ready to access the lending market. They are also the last resort in case of an emergency.

Money from family members and friends and relatives could be in the form of equity or loan.

“Never expect a loan to a friend to be paid back if you want to keep that friend.” Bryant H. McGill

  • Angel Investors

These are investors usually HNI.  They come together and invest in early-stage start-ups. They invest small and invest in several companies to spread their risk. They invest at a very early stage of the business.

They take a higher risk than the investors coming at a later stage hence they get the shares at a cheaper valuation.

“When you first meet an investor, you’ve got to be able to say in one compelling sentence what your product does.” Ron Conway

  • Venture Capital Fund

These are formal funds which invest in start-up companies. They invest when the company has established a good team or owns IP, or some innovate ideas and has good market traction.

Usually, they are not so early-stage investors and not even late-stage investors. They invest after angel stage and before the Private equity stage.

“If you come in with a theory, and a plan and no data, and you’re 1 of the next 1000, it’s going to be far far harder to raise money.” Marc Andreessen

  • Private Equity (PE)

These are funds which invest in growth stage companies. They invest in companies in a fly mode and on its way to become a large company.

For entrepreneurs, the strategical decision is how much to dilute at what stage of the business. They have to balance the liquidity requirements versus diluting minimum equity to keep the balance equity for the higher valuation at a later stage.

PE investors also invest in large and listed companies. The amount of investment is usually large. As in all the forms of equity investments, strong business growth potential and a strong team are the prerequisites for attracting PE investors.

  • Family Office

This is another new means of finance. Now a day wealth of NHI is managed by professionals. They are known as Family Office. They invest across the investment categories as per the mandate from the HNI.

They could be investing in a real estate project or in a start-up or act like private equity funds or even can invest in a movie. They are usually open to all kinds of investment ideas and all kinds of investment size.

Though the fund is managed by a professional team since the investor is an individual or a family the decision making is faster.

  • Public Issue of Equity Shares

This is one of the popular means of finance for large companies.

Known as Initial Public Offer IPO or Follow up Public Offer FPO, the public issue is the money in the form Equity Shares.

There are SEBI and exchange guidelines for a company which wants to raise money from the public issue market. In order to promote smaller companies to access the public money market, there is an SME exchange.

The present SME exchange issue guidelines are as under:

  • The post issue paid up capital of the company (face value) shall not be more than Rs. 25 crores.
  • Must have positive Net worth.
  • Net Tangible Assets should be Rs 3 Crore.
  • The company or the partnership/proprietorship/ LLP firm or the firm which have been converted into the company should have a combined track record of at least 3 years.

The companies which want to raise capital from the international market, they can access it in the form of American Depository Receipts (ADR) and Global Depository Receipts (GDR) issues.

Public issues make the equity of the company tradeable on the stock exchange. Most large companies are traded companies. However stringent compliance requirements have made many companies to delist their shares.

  • Preference Shares

This is another form of raising capital. This is a form of capital but the difference between equity capital and preference capital is of risk and reward.

Equity shares are the riskiest investments hence the investors are rewarded the highest. All the profit remains in the company after paying all the expenses and tax belongs to the equity shareholders.

But in case of loss or winding up of the company, equity shareholders are paid last after repaying all the obligations of the company. They may lose their entire money if the company does not have enough resources to pay them.

The preference shareholders are the investors just above the equity share investors as far as the risk is concerned. They are paid before the equity investors are paid a dividend. They are liquidated first before the equity investors.

Preference shares are issued at a fixed dividend rate like any fixed return instrument. But here there is no guarantee of a fixed return if the company is not performing well.

This can be classified between equity shares and secured loans.  They only have preference over equity shares and their returns are at a fixed rate.

There are some purposes which this investment instrument serves.

  • Rights Issue

This is raising money from existing shareholders. If the company is performing well the promoters might issue shares from existing shareholders only. The company, however, should be confident that the existing shareholders would be able to fully subscribe to the shares. This is equally true when the company is not performing well and the promoters think no new investors would like to invest.

  • FDI

Foreign Direct Investment or FDI is the measure of confidence foreign companies are showing in the country and in the company, they invest in.

Foreign collaborator company, investing in the company is classified as FDI investments.

  • Crowd Sourcing

This is a new means of raising finance. Here several small individual investors invest in a project of their choice.

They invest in a company or a book publishing project or a movie or anything which touches their sensibilities.

Suppose a movie director has put a brief about his project and the estimated budget. The registered investors on the site would evaluate the person, the project and the risk. 20 people agree to invest in the project and the director achieves the closure.

The money is parted with by the investors, the movie is made and the project earned a good return. The directors would share some return with the investors. There is no need for any intermediary. Just a good online platform does the job.

There are several such platforms and several such deals are happening. Everything is trust based.

  • Barter

This could be a good way to get what entrepreneurs want in exchange of services /goods the company deals in. Though this may not classify strictly as the capital source, it is some times useful.

Like employees work for sweat equity against the cash salary. The company can save cash and get the people to work for the company at lower than the market value.

Bennet Coleman Brand Capital is about advertising against the equity. The group owns various media publications. The company mainly in the start-up phase wants huge and aggressive marketing. Here is a company which does the advertising for the company on its platform against the equity in the company.

It may not work in all situations.

It may not work in all the situations but this could be a win-win situation if the purpose of fundraising is publicity and advertising.

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These are mainly the source of equity capital. The business loans are also of several types and can be availed from several sources.

Debt Instruments

Loans are usually availed from banks and NBFCs. These days there are some other options also. We will see all in the post below. RBI is the regulatory authority in India for the lending business.

“It’s easy to get a loan unless you need it.” Norman Ralph Augustine

  • Unsecured Loans

Under Govt’s credit guarantee scheme, business loan up to Rs. 2 crs (Rs. 20 mn) can be availed as unsecured loan without any collateral.

Even other than this there are loans which are unsecured in nature are available known as Personal loans.

  • Loan Against Property/Investments

These loans are given against immovable property like office premise, house, godown, etc. The loans are also available against shares, fixed deposits, insurance policies, etc investments.

  • Term Loan

Given by the bank to buy assets. Usually secured against the assets financed and some additional security.

This loan comes with fixed repayment tenure payable in monthly installments.

  • Working Capital Loan

This is the usual cash credit limit is given against stock and receivable of the business. This loan is renewed every year based on the company’s performance.

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  • Packing Credit Loan

This loan is given against the conferred export order to buy raw materials. One the export is done; this loan is converted into bill discounting.

  • Bill Discounting

This could be local as well as foreign bills. This is a kind of advance receipt of money on goods sold on credit. Bills raised after the sales or export can be discounted with lenders.  On the due date, the customer pays to the lenders.

  • Discounting of Receivables

This is another good option. Suppose you are in a school business where every month you are going to receive fees. The lenders would lend in advance against the fees and they will recover this advance every month from the fees.

This form is very popular for rent discounting known as Lease Rent Discounting (LRD). The property owner discounts the lease rent in advance, avail large sums as loan and can buy another property from the loan amount. This property can again be given on lease and lease rent can be discounted again.

  • Debentures/Bonds

Usually listed companies’ issues debentures. This is a kind of loan from the investors. This could be secured, unsecured, convertible into shares or non-convertible.

This comes with a fixed rate of interest and fixed tenure. In case of secured debentures, debentures trustees, a third-party entity, manages the security on behalf of the investors.

  • Fixed Deposits

This is issued by listed companies. This is an unsecured form of investment and therefore command a higher rate of interest for the investors. For the company, this is an additional form of capital. Since it is unsecured., the company need not offer any security.

The investors would like to compensate for unsecured nature by seeking a higher rate of interest.

  • Customer Advance

This is an old but important source of capital. Existing and potential customers can pay an advance against the order to be executed.

  • Merchant Advance

Credit card companies give advance against future credit card usage to the vendors.  This is possible when a company uses credit cards as a means of payment from customers.

  • Credit Card Cash

This is very expensive money but for entrepreneurs looking for short term money, this could be a source.  Using this money on a long-term basis and frequently is dangerous. This is a sign something is seriously wrong with the business or promoters’ fund-raising capability.

“A cash advance on a credit card is one of the worst types of borrowing because the interest rate is typically 21 percent or more.” Suze Orman

  • Foreign Currency Convertible Bonds

This is for large companies. They can raise convertible debentures from foreign sources.

  • Peer to Peer (P 2 P) Lending

This is a new but interesting creature in the market. In crowdfunding, the investor is investing as equity investors, whereas in Peer to Peer lending, the investor is lenders and receives monthly interest.

The borrowers are independent of any lending agency. In order to keep credit rating high among the individual lenders, the borrower has to keep an impeccable track record of interest and loan repayment.

There are more than 15 P 2 P lending companies in India.

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This list of capital options is more or less exhaustive but novel options are hitting the market every now and then.  Capital is not scarce, but what is scare is investible business opportunities. Be the one and capital will never be a constraint.

“There are two ‘i’s’ in Fundraising – they should stand for inspiration and innovation, not imitation and irritation.” Ken Burnett.

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