Funds acts as fuel for a business organization for its proper functioning. It stops working like a vehicle stops without fuel. Adequate supply of funds is highly important for proper functioning of any business operation. Funds can be raised in the form of Loans & Equity depending upon the stage of a business maturity and its needs.
There should be right mix of loans & equity in operational capital to achieve higher financial efficiency. Any organisation with over leveraged or under leverage can’t achieve the desired financial efficiency.
Whenever excess debt fund / Loans are raised without equity infusion it risks the business into high leverage & if business is highly dependent on owners funds then it can’t avail the benefits of low cost funds available in the market. This is primarily well managed in suitably mid-corporate to large corporate entities & same is valid for all business houses including MSMEs. For the sake of elaboration, each part is explained below in detail:
Debt / Loans
Loans are extended by lenders according to the Business Credentials & Availability of Collateral. Loans can be raised from various institutions like Nationalized Banks, Private Banks, NBFC, Financial Institutions including HNI Investors or lenders.The ideal component of debt funds is three time of the owner’s capital in the business & wherever additional funds required over & above this ratio, then same proposal is considered as risky profile or over leveraged profile. Banks advised in over-leveraged cases the introduction of additional business capital as equity.
Further debt /loans can be secured or unsecured depending upon the availability of collateral. The secured loans carry better terms from lenders compared to unsecured loans. Both type of loans explained below:
Unsecured Loans are purely on the basis of Business Credentials. It does not require any collateral or security. It can be extended as Working Capital Credit line; Working Capital Term Loans; for buying Machines & Equipment and all kind of allied business needs.
General Lien is Marked on Assets in unsecured loans
Though unsecured loans are extended without security / collateral but a general lien is marked on the business assets & personal guarantee of business stakeholders is also taken.
Secured Loans are extended by lenders considering the value of security & business credentials. These can be extended for working capital needs as credit line or term loans; Buying Machines & Equipment; Construction of Factory Building; Purchase of Factory Land & all kind of business needs proposed by an entrepreneur. As borrowings are back by asset so carry better terms from lenders.
Unlike traditional Loans, the Unsecured Loans has been evolved a lot in last decade because it is totally focus on business credentials & future prospectus of the business. With Loan Syndication is a highly effective & efficient tool in raising funds when collateral are not available. It is pool of various lenders who lend according to their individual risk appetite. The target funds are raised by this process in short possible time period because each lenders lend partially as per its comfort.The repayment tenures are usually offered for 3 years and renewed after completion of tenure by judging the past repayment track and business performance.
For an MSME, it is highly regarded as “funding at the hour of need”. We usually observe that when working capital credit line and security options are exhausted then raising Funds through Loan Syndication is very handy & It raised primarily without collateral or as unsecured loans from multiple institutions to ensure adequate supply of funds.
Equity is highly important source of funds & opens highly rewarding opportunities in the form of unlocking Business Valuations through listing of stocks. A corporate entity is highly regarded as most acceptable status of business where investors assess business information while deciding their investment decisions. A well manged & transparent flow of information translates into higher confidence from investors and results into higher valuation of its shares.
A Business House can tap unlimited resources through this route provided their working is well planned. This route of funding offers highly rewarding returns for stakeholders through value unlocking of their stocks. An organisation (including MSME entity) can avail better terms from lenders when the business is adequately funded from equity portion. Any compelling opportunity which is over leveraged with high ROI carries high interest from investors compared to under leveraged entity with low ROI. A better managed both type of funds (equity & debt) gives perfect picture for investors to bet on.