There are several finance options available in India. The most popular options include Debt Finance and Equity Finance. These options are used to raise capital for business needs. Many companies use a combination of both finance options. Business owners usually choose from the above two options to raise capital for their business.
Companies that are in demand of capital generally look out for two options: Debt Finance and Equity Finance. Most of the time, the choice depends upon the source of funding readily available for access by the company. Debt finance refers to the act of borrowing money, while Equity finance refers to the act of selling certain portions of the equity to raise capital. Equity finance’s main advantage over Debt finance is that there is no requirement to pay back the amount in equity finance. In addition, equity finance does not cause any obligations and hurdles for the company. The main advantage of Debt financing is that the owner of the company does not lose ownership of the company in any way possible.
Equity Finance:
Equity finance is a way to raise capital for a company by selling a portion of the company’s equity. The ownership can be distributed among individuals as per the decision of the Business owner. There is no requirement for the Business owner to pay anyone any amount of money. The equity distributed among individuals generate dividend for them based on the performance of the company. Companies usually try to provide an excellent return to the investors to maintain a good image among the masses.
The disadvantage of Equity financing is that the business owner would be required to buy every equity share of the company to achieve the complete ownerships of the company once again. It can be expensive if the share prices go high due to the performance of the company. This is a very major issue that a lot of companies have faced in the past. This can prove to be a major loss for the business owner in case the business fails due to any reason.
Debt Finance:
Debt Finance is borrowing money and repaying it with a certain amount of return based on the accepted condition between the lending and the borrowing party. In some cases, debt financing can limit a company’s actions for certain fields. There are numerous advantages of Debt financing. Debt finance’s most significant advantage is that the lender does not have ownership over the borrower’s business. Once the borrowed amount is paid back, the relationship between the lender and the borrower ends. In addition, the interest charged on Debt finance options is usually Tax deductively, which can be considered to be a huge advantage for the business owners.
Debt finance’s disadvantage is that it requires the borrower to pay back the loan amount regularly as per the lending institution’s policies. In addition, in the majority of the cases, the lending body requires the applicant of the loans to provide some kind of security which can be an asset that the business owner owns. Therefore, if a person chooses the Debt finance option, the monthly expenses would be increased for him/her.
The requirements for the application process of Debt Finance options include the following:
1) Evidence/proof of identity of the applicant.
2) Proof of residence of the applicant.
3) Age Proof of the Applicant.
4) Documents related to the Business the applicant owns.
5) Bank Details of the applicant like account number, IFSC code, etc.
However, an Online Loan Calculator can be used to estimate the amount required to be repaid during the loan tenure. The requirements to use a loan calculator are the rate of interest, loan amount, and the tenure of the loan. Therefore, these loan calculators can be very helpful for estimations of the repayment amount.
It is advised for you to raise capital with a mix of equity and debt finance. Most companies follow this method to sustain themselves for a long time. If your company has just started, it would be advised to go for Equity fundings as the monthly repayment burden would significantly reduce. There are several available resources in online and offline mode that can help you further understand the working of Debt financing and equity financing.
Also read this: Why approval of the Personal Loan gets rejected
