Published on Sept 9, 2022Updated on Oct 20, 2023
Once you begin a business, you need to constantly sustain it and earn profits for the same. You can easily begin a bootstrap company; it means investing personal capital. Although growing a business with just an initial capital investment is not possible. Just as you need to oil a machine to work, you need to invest more capital for a business to run.
Just as profit is the primary motive of almost all business organizations, capital is the priority requirement of the same. If you wish to expand your business and take it to the next level, you will need the right kind of financing to support your ideas and plans. In today’s start-up culture, many such modes are being introduced. The 2 most common ways that businesses raise capital are through either business loans or leveraging equity financing options. Let us understand them.
A business loan is considered to be a debt financing mode of raising capital. In this mode, you take up loans from financial institutions such as banks or non-banking financial companies (NBFC), etc. Here there are 2 parties – borrower and lender. Depending on the amount you need, your eligibility and the lender’s policy, business loans can be secured or unsecured. Secured loans are obtained when you pledge assets such as immovable property (loan against property) or financial assets (fixed deposits - overdraft facility, market linked instruments - loan against securities) as collateral.
Unsecured business loans are obtained based on factors such as the borrower’s creditworthiness, business profitability, stability of income, etc. - usually upto a maximum of INR 75 Lakhs*. It is the most simple and popular way of raising money. The positive angle of borrowing a business loan is that you need not give up control over your business to the lender or part ways with your equity. You will continue to be the sole owner & decision maker of the business.
The other popular mode of raising capital is equity financing. Here, you can raise capital but in exchange for the same, you need to provide ownership rights to the lenders. Equity financing can be done through Venture Capitalists (VCs), angel investors, Private Equity (PE), and other modes. A company in the growth stage can raise money through this mode. The financiers or investors have a say in the business matters and need to be aware of what is going on in the company. As the business grows, so does its value, and thereby the return on equity for its investors. In case the business fails, the investors have the right to sell off the business and/or its assets in order to recover their losses. Depending on the quantum of equity funded, the investors also have the right to take part in decision making in terms of business operations and management.
Must Read: Here You Can Know About Business Finance
As we have an overview of the 2 main modes of financing for a business, let us understand which is better and which one will suit your business.
Both the options have their pros and cons, thus making an informed decision is crucial. After overlooking the above factors, you may choose which option is most suitable for your business and works in your best interest.
SMFG India Credit provides eligible borrowers unsecured business loans upto INR 75 Lakhs* at attractive interest rates and tenures upto 48 months*. You can also check our secured lending products such as loan against property and loan against securities. Apply today or visit your nearest branch to know more.
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*Terms and Conditions apply. Loans are disbursed at the discretion of SMFG India Credit.