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How to Raise Fund for a Private Limited Company?

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How to Raise Fund for a Private Limited Company?

Puja Bhardwaj | The CEO Magazine

Capital is the key factor to expand the horizon of services and resources and sustainable growth of any business. And, lack of funding to suffice the operational requirements becomes the reason for business failure. But pitching for investments and getting a deal is not a piece of cake. Company owners in Private Limited Company find limited sources to infuse funds for the projects and operations of the company.

In order to support entrepreneurs, here, we are listing the best sources to gain funding and keeps business functioning after the incorporation as a Private Limited Company:

Bank Finance

Bank is one of the most important resources for taking financial support. A Company can easily take term loan and a working capital loan from banks or other financial institutions against the security of its assets, moveable and immovable properties. There are different types of finance that a company can avail from a bank like:

  • Term Loan
  • Working Capital Loan
  • Bank Guarantee
  • Letter of Credit
  • Bridge finance
  • Cash credit
  • Bank overdraft
  • Purchase or Discounting of Bills
  • Invoice factoring
  • Trade credit/Buyers Credit
  • Packing Credit in foreign currency

Sweat Equity Shares

As per Section 54 of the Companies Act 2013, Private companies having scarce funds or startups can issue sweat equity shares to its directors or employees for consideration other than cash in lieu of the services. These shares are profitable for both the company and the Employees; the company would not have part with major funds for availing value-added services or know-how, and the employees would be inclined to work for a company in which they have a stake.

Angel Investors

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Angel investors are high net worth persons, who lend funds in exchange for the ownership stake in any company. Because they get equity position in the company, angel investors provide substantial amounts of capital when they find the company where they wish to invest. Angel investors are mainly founder professionals in private equity; it any business wants funding, it must pitch its need for financing with current financial statements, complete business plan, and a viable exit strategy.

Venture Capitalists

Venture capitalists invest in business during the startup stage. If they believe the business will be profitable, the venture capitalist invests money in exchange for equity in the form of company shares. And, when the company makes money, the venture capitalist also earns profits.

Preferential Allotment

Preferential allotment of shares is made according to the provisions of Section 62 (1) (c) and Rule 13 of Companies Rules 2014. Preferential offer is basically an issue of shares by a company to choose any person or group according to its preference. It does not include shares issued by way of private placement, rights issue, bonus issue, employee stock option or the like. A company can issue shares on a preferential basis to its promoters, other companies, venture capitalists, angel investors, etc. for raising funds as required by it.

Friends and Family

Initially, personal resources are used to finance business operations in a private limited company. Once financing from personal savings dries up, owners may get financial support from their friends and family members. Here the plus point is that friends and family who invest in the business do not take an active role in operations.

Conclusion

For any business, there is a need for outside sources of capital. A business without external funding cannot go too long and unable to take advantage of market opportunities. While the plethora of lending options may make it easier than ever to get started, business owners should make ways to get the required financial assistance.

Know the disadvantages and advantages of Private Limited Company

How to register a company?

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