Adequate Funds for Business Growth
Funds act as fuel for a business organization, ensuring its proper functioning.
Just like a vehicle stops without fuel, a business halts without adequate funds.
An adequate supply of funds is crucial for the smooth operation of any business.
Funds can be raised in the form of loans or equity, depending on the stage of a business’s maturity and its needs.
There should be the right mix of loans and equity in the operational capital to achieve higher financial efficiency.
Any organization that is over-leveraged or under-leveraged cannot achieve the desired level of financial efficiency.
Why Adequate Funding is Crucial?
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Whenever excess debt funds or loans are raised without equity infusion, the business is exposed to high leverage risk.
If a business is highly dependent on the owner’s funds, it cannot avail the benefits of low-cost funds available in the market.
This aspect is generally well managed in mid-sized to large corporate entities, and the same principle is applicable to all business houses, including MSMEs.
Each part is explained in detail below.
Types of Funds and Their Importance
1. Debt / Loans
Loans are provided based on business credentials and availability of collateral. These can be sourced from:
- Nationalized Banks
- Private Banks
- NBFCs
- Financial Institutions
- HNI Investors
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Ideally, debt funding should be three times the owner’s capital. If requirements exceed this ratio, the profile is termed over-leveraged, and banks usually recommend additional equity infusion.
Secured Loans
Secured loans are backed by collateral, making them more favorable in terms of interest rates and repayment terms. These are ideal for:
- Working capital
- Buying machinery & equipment
- Factory land/building purchase
- Construction & infrastructure setup
Unsecured Loans
Unsecured loans are offered based on the credibility of the business, without the need for collateral. These are best suited for:
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- Working capital credit lines
- Term loans for business needs
- Machinery and equipment purchase
Even in unsecured loans, lenders mark general lien on business assets and may ask for personal guarantees from business owners.
2. Loan Syndication: Smart Funding for MSMEs
Unlike traditional loans, unsecured loans have evolved a lot in the last decade because they are totally focused on business credentials and the future prospects of the business.
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Loan syndication is a highly effective and efficient tool for raising funds when collateral is not available. It is a pool of various lenders who lend according to their individual risk appetite. The loan syndication process allows the target funds to be raised in the shortest possible time period because each lender lends partially as per their comfort. The repayment tenures are usually offered for 3 years and are renewed after the completion of the 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 the working capital credit line and security options are exhausted, raising funds through loan syndication companies in India becomes very handy. It is primarily raised without collateral or as unsecured loans from multiple institutions to ensure the adequate supply of funds.
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3. Why Equity Funding is Essential for Business Success
Equity funding is a highly important source of funds and opens up rewarding opportunities by unlocking business valuations through the listing of stocks. Moreover, a corporate entity is highly regarded as the most acceptable status of business for equity investment, where investors assess business information while making their investment decisions. Consequently, a well-managed and transparent flow of information translates into higher investor confidence and results in a higher valuation of its shares.
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A business house can tap unlimited resources through this route, provided its operations are well planned. This route of equity funding offers highly rewarding returns for stakeholders through value unlocking of their stocks. An organisation (including MSME entities) can avail better terms from lenders when the business is adequately funded through equity and debt financing. Any compelling opportunity that is over-leveraged with high ROI on equity investment attracts high interest from investors compared to an under-leveraged entity with low ROI. A well-managed balance of both types of funds (equity and debt financing) gives a perfect picture for investors to bet on.
Why Choose NKB Kredit for Business Funding?
FAQs on Adequate Funds for Business Growth
Much like a car needs gasoline to function, a company requires adequate funding to run effectively. When there isn’t enough capital, daily activities can be interrupted, impacting overall company expansion and solidity.
Businesses use debt funding, repaid with interest over time, and equity funding, which provides capital in exchange for company ownership. Combining both strategies can foster financial stability over the long term.
Loans that are secured use assets, such as real estate, equipment, or physical property, as backing and usually provide more favorable interest rates. Unsecured loans, in contrast, don’t require collateral but greatly rely on your company’s creditworthiness and financial history.
MSMEs can get financing through loan syndication from a group of lenders, bypassing the need for substantial collateral. This approach provides fast capital by dividing the loan among several financial institutions, tailored to their risk tolerance.
Raising capital through equity provides investment without creating any debt. This not only fortifies your company’s financial foundation but also enhances investor trust and aids in achieving better valuations, especially when your business is run effectively.
A business that uses excessive debt relative to its equity is highly leveraged. This elevates the strain of debt repayment and financial jeopardy, frequently causing operational difficulties and decreased appeal to investors.
NKB Kredit provides professional advice on loan syndication, and sets up customized business loans. They work with leading banks and top financial institutions. They manage a straightforward and effective funding process, both for secured and unsecured financing, that’s designed to fit your company’s needs.