Contributing to almost 45% of India’s manufacturing output; MSME productions form 40% of India’s export. Additionally, it also employs 40% of India’s workforce, making it one of the greatest contributors to the Indian economy.
The impact of MSMEs and start-ups on the Indian economy makes it crucial to understand the financial setup of these organizations.
Understandably, proper structure and management of these corporate and business setups are crucial to maintain and even develop their contribution to the economy.
In the same regard, it is vital for every entrepreneur to understand the nuances involved in corporate financing and its impact on capital structure.
What are capital structure and corporate financing?
Capital structure refers to a combination of different revenues which are generated in a business venture, to achieve the funds that are necessary to sustain and grow the firm. It contains equities, credit like loans, earnings, etc.
Unlike financial structure which simply deals with short-term loans, capital structure encompasses all existing debts.
While entrepreneurs understand how to maintain their capital structure, it is vital they also understand corporate financing. The primary target of the latter is to increase the value of a business, and understandably it directly impacts the capital structure of a company.
The two basic types of financing in businesses are discussed below –
- Debt financing: The simplest method of financing a business is by availing funds from a financial institution. It is imperative to understand that the profitability of a business goes down in case they avail this option since every month a fixed portion of the generated revenue must be paid to clear the debt.
- Equity financing: This method requires entrepreneurial financing since it refers to the selling of a company’s shares. Releasing shares of a business to the market does not impact the profitability of a firm, though it does impact the share percentage of the owners.
Entrepreneurs must note the advantages of both the above methods before finalising on either of them. While working capital finance is necessary for small firms, businessmen should choose financing options carefully
Different methods of maintaining capital structure by debt financing
There are numerous methods which an entrepreneur can explore to maintain their capital structure by corporate financing.
These methods are discussed below in detail –
- Business loans
Multiple financial institutions offer business loans that are a convenient method of financing a venture. These loans can go up to Rs.30 lakh and have low-interest rates. The approval of these loans is typically quick, while the application method offered by different NBFCs is very easy.
NBFCs like Bajaj Finserv also provide pre-approved offers which make the application for such loans convenient and prompt. These offers are available on several products like business loans, personal loans, home loans, etc.
- Angel investors
Angel investors are individuals who look to invest in profitable businesses and therefore can be a good entrepreneurial financing option.
Typically, the rate of interest offered by them is high, though they might also consider buying stakes of a company. An advantage of angel investors is that they can advise on the handling of finances of a business.
- Equity investment
Equity investments are comparatively more complicated. It can involve a single individual or a group of investors who provide financial assistance in exchange for part ownership of a business.
- Loan against properties
This is a good option for entrepreneurs looking to avail corporate financing especially since these financial products offer very high loan amounts. Additionally, the rates of interest on them are also quite economical.
Entrepreneurs who are availing different debt financing options should look into tax-saving tips for small business owners. This can effectively save a lot of money from their business revenue, thereby increasing the profit margin.