Funding and Finances for Start-ups

A company can avail finance through debt as well as equity by keeping these things in mind
Funding and Finances for Start-ups
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Co-founder, LegalWiz.in Private Limited
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A new business will require funding regardless of its type and structure. No doubt, private limited companies find it relatively easy to avail funding, there are other business structures too requiring funds. And when it comes to availing funds for business from external sources, there are a few legal aspects that every startup should consider before getting into it further.

Private Limited Company is the most favoured form of business to avail funding and financing with ease. It offers two ways to raise funds:

A.                  Equity Financing

B.                  Debt Financing

Key points to consider here:

•    A private limited company cannot issue shares to more than 200 shareholders.

•    Issuing equity shares will entail sharing ownership.

•    The shareholders will enjoy voting rights and thereby impact the company’s management.

Types of Equity financing

A.                  Private Placement

Issuing shares to the selected small group of persons.

•    The company’s board of directors must select a group of persons not exceeding 50 in a financial year.

•    The money shall be received in any manner other than cash.

•    The investor does not have any right of renunciation.

•    The shares must be allotted within the 60 days from the date of receipt of application money. Otherwise, the company has to repay it in 15 days after the completion of 60 days

•    Failing to repay will make the Company liable to repay it along with 12% annual interest.

•    The Company shall file the return of allotment with the MCA within 15 days from the date of allotment.

•    The company shall not utilize money unless the return of allotment is filed with the MCA

  • ESOP –Equity shares issued to the company directors or employees at discount for providing their know-how or for providing intellectual property rights or value additions.

  • Debt Financing – It is the fund raised by borrowing money from a bank or financial institutions or through other instruments.

Key Points

•    The MOA and AOA of the company define the borrowing powers for directors.

•    Debt may be secured or unsecured by the assets of the company.

•    A fixed interest amount must be paid on it.

Different type of Debt Finance for Company includes:

  • Bank Loans

•    One of the preferred ways of finance for Startups and SMEs.

•    It can be with or without security.

•    A company can avail overdraft or credit facility or guarantee from the banks.

  • Debentures

•    Includes debenture stock, bond or any other debt instrument issued by the company.

•    A company may issue convertible debentures into shares with prior approval in general meeting.

•    Any company cannot issue debentures using voting rights.

•    It has to create a debenture redemption reserve account for interest payment.

•    Any redemption of secured debentures shall not exceed 10 years.

·         Appointing of a debenture trustee is mandatory if the company falls under the criteria as specified under the law.

•    Though, the following companies can issue debentures with a redemption period exceeding 10 years up to 30 years.

-    Companies engaged in setting up of infrastructure projects.

-    Infrastructure Finance Companies.

-    Infrastructure Debt Fund Non-Banking Financial Companies.

-    Companies with permission of Ministry or Central Government or RBI or National Housing Bank or any other statutory authority.

A company failing to pay interest or redeem debentures allow all the debenture holders to apply to the tribunal for passing a redemption of debentures order. And payment of interest and every officer in default may be punishable with fine or imprisonment.

  • Limited Liability Partnership and Partnership Firm

There are two ways for startups registered under LLP and Partnership firm, to raise funds.

1.    Capital from Partners

•    Partners contributing to the capital at the time of incorporation.

•    Post incorporation, partner(s) can bring in additional capital to raise its limit.

•    An LLP and partnership firm has to amend the partnership deed for an increase in capital. This is done by enabling a supplementary deed and payment of additional stamp duty.

•    The firm can also add a new partner to fulfil capital requirements.

2.    Loan

•    Both, LLP and Partnership firm can take a loan from any bank or financial institutions as financial assistance as per the deed clause.

•    In absence of any such clause, it will be regulated by the LLP ACT or Partnership Act.

  • Proprietorship Firm

A proprietorship firm can self-finance the firm or can avail loan from a bank or financial institutions. Other kinds of debts for all business structures include trade credit for purchasing goods or raw materials at credit that helps to fulfil their working capital requirement without any collateral security. Some businesses also consider ‘factoring’ as a way to sell their receivables of future date to the person at a commission. Here, the company can receive the payment in advance before its due date.    

Conclusion

A company can avail finance through debt as well as equity. But other types of entities can only avail finance by creating the debts. Further, there are many other options are available for debts other than the loan. Hence a Private Limited company is considered as the best suitable format for funding and financing.

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