# How do I raise fund for my business? This is one of the crucial questions that always come to your mind when you are planning to start a new business, expand your existing business, or multiply your business (which means taking business to a new geography). For all these purposes, you need funds. In business, funds can be raised in the following two ways: ## **1. Debt** In simple terms, debt means taking loans. Debt is issued by institutions like: **► Banks –** State Bank of India, HDFC, etc. **► Non-Banking Financial Companies (NBFC) -** HDFC Limited, ICICI Home Finance, etc. **_Banking rules and regulations are not applicable on NBFCs but they do issue loans._** ## **2.** **Equity** Equity ****means getting partners and investors in your company. Equity is raised from: **►** Investors **►** High net worth individuals **►** Big fund houses **►** IPOs (Initial Public Offerings) Now, let’s discuss the 10 fundamental differences between Debt & Equity that can help you choose the best between two. # **Parameter#1: Cash Flow Probability** You need to determine what is the probability of cash flow in your business. **►** Does your business have such a cash flow that you get monthly returns?, Or **►** Does your business not get returns in the starting years but get a sudden growth later? If the probability of your cash flow is high, then you can take debt easily. If the probability of your cash flows is low or delayed cash flows, then you should raise funds through equity. # **Parameter#2:** **Profitability** If the profitability of your business is high, then you can take debt. This is because if you have high margins, then your cash flows are also high. So, you can easily repay the debt taken at any interest rate. On the other hand, if your business margins are low, then you should take equity instead of debt. This is because it allows you to share the risks. This will help you to get rid of the burden of interest and repayment in case of cash flow delay. # **Parameter#3: Cost of funds** Any fund that you raise has a cost associated with it. Cost means you need to give some returns against the fund you borrow. The cost of debt is lower than the cost of equity. So, you need to ascertain whether you want to keep low cost or high cost. Equity cost is higher because you are offering partnership in equity. You are offering the stake and make the investor your partner in your journey of growth. On the other hand, in debt, you have to give fixed return. Based on this fixed return, you can borrow the money and repay it without giving any partnership. So, the cost of debt is low. # **Parameter#4: Collateral** Collateral means any plant, property, or equipment. If your business has any type of collateral, then you can take the loan from a bank because bank needs some collateral or security to give you loan. For example, if you are taking a loan of Rs. 1 crore from a bank, then it will keep asset of Rs. 1.5-2 crores worth as collateral. If you do not have asset or collateral, then you cannot take loan from a bank on the basis of your promise. However, you can get equity based on a promise without any collateral. If an investor understands your growth plan or strategy, then it can invest in your business. # **Parameter#5: Investor risk** In debt, risk of an investor is low because losses can be recovered by selling the collateral. On the other hand, in equity, investor risk is high because he does not have any collateral to recover money. He only has your promise. So, if your business does not work, then he will also get fail along with you. **The person who is taking risk will have more cost. Thus, the cost of equity is higher than the cost of debt.** # **Parameter#6: Ownership** Ownership means the person or institution investing in your business will have any ownership in your business or not. If you are borrowing money against collateral, paying monthly EMIs, and repay the amount [after 3-5](x-apple-data-detectors://1) years, then you need not give any ownership. So, there is **no ownership in case of debt**. However, if you are borrowing money based on your growth plans or strategies, then the investor should have some ownership in your business so that he can take data from you. Thus, he will take shares of your company and position in your directors. So, **investors get ownership in equity**. # **Parameter#7: Returns** In case of loans, ****returns are fixed as per the prevailing market rates. He cannot take returns more than the market rates because you are borrowing money from them and thus, their interest rates are broadly fixed. However, in equity, returns are variable. These returns can either be very high or no return. # **Parameter#8: Upside for the Investors** Upside means the person or institution investing in your company will get any growth or not. In case of debt, there is no upside growth. They have fixed returns and fixed amount. You need not share your business growth with the debtors or banks. However, in case of equity, your upside potential is very high. You might have seen companies whose share prices multiplies 2 to 3 times in one or two years. Some of the companies which have established 10-20 years ago have paid 35-40% yearly returns to their investors. # **Parameter#9: Growth Can Capital** Debt has low growth capital because nobody is going to pull you back to grow. Debt pulls you back because you have to give monthly interest and final payment to them. On the other hand, in equity, you don’t have to pay any interest. You can use the money received from equity investors comfortably grow for 2-3 years. When your company grows well and the value of your company increases, it attracts more investors and the first investor can exit or he may stay depending on your future growth journey. # **Parameter#10: Capacity to Raise Capital** Every business has a capacity. It cannot borrow money beyond its capacity. For example, if you are earning Rs. 1 lakh per month, then can you pay Rs. 2 lakh per month as an interest? Obviously not! In the same manner, business is anlaysed first. The amount of loan a business can take is very limited based on your income. You get loan based on your income. When a bank analyzes the income of a company before giving a loan, it checks that the company can only use 50-60% of its income to repay the loan.  If the company reaches to this level, no new bank will give loan to the company. However, in equity, if you have growth possibilities, then you can raise equity multiple times and use the capital obtained to expand your company. When your equity base increases, then banks become comfortable and they also start giving a loan to you. So, you can borrow more money when you have more capital in the form of equity. Evaluate your business based on the above 10 pointers whenever you want to raise capital for business expansion. This will help you in deciding whether you need debt or equity. Apart from these two major sources, there is one more important source of getting money- Customers. Customers are the best investors. If you have a business model in which you can get cash flow from customers through pre-bookings, then you should raise money from your customers because their money is the best and the cheapest. Using these tips in the given frameworks to evaluate your business, you can decide which method suits your business model to move ahead.