Private Limited Company (PLC) is one of the most preferred corporate business structures for entrepreneurs. Private limited company registration can boost your business with chances of high returns on investment, making it the best option for a lot of start-ups and new edge entrepreneurs. No other form of business structure offers fundraising flexibility like PLC does. Hence, investors always prefer to invest in a firm incorporated in the form of a Private Limited Company. But raising funds for your Pvt Ltd Company is not an easy task. This blog will discuss how you can raise funds after the registration of your company is done. So keep reading!
Private companies have various fundraising options and every option comes with its own challenges. Below mentioned are some of the ways a Private Limited Company can raise funds:
During the initial stages of a private company, most entrepreneurs are likely to raise finance from personal resources. Pulling out savings or mortgaging personal assets are common ways to raise funds. Your friends and family play a vital role in raising funds. It is not uncommon for entrepreneurs to raise funds from friends and family during the initial stages of their businesses. This situation does come with its set of advantages. The chances of your friends and relatives who invest in the company are less likely to actively participate in the management, giving you more control.
Another way to raise funds for a private limited company is through Right Issue. The term “Right Issue” refers to a shareholder’s exclusive right to acquire shares of the Company before a third party. Section 62(1)(a) of the 2013 Companies Act regulates the right issue of shares. According to Section 62(1)(a), shares must be offered in proportion to each existing shareholder’s share of the company’s paid-up share capital on the date the additional shares are issued, to people who are holders of equity shares at the time of the offer. What this means is the existing shareholders must be offered the additional shares in proportion to their present shareholding from the new capital introduced by the company.
According to section 62(1)(b) of the Companies Act 2013, a private company may raise money by issuing shares to employees under a plan of employee stock options, subject to a special resolution adopted by the company and subject to any limitations that may be required. The purpose of the ESOP, which allows employees to invest largely in the shares of the company, is to benefit both the employee and the employer. A chance to purchase a predetermined number of shares of a company at a price below market value is provided to an employee by the employer and vest after a predetermined number of years, or the option period.
This is to motivate employees to achieve a target and performance in certain years which is known as vesting conditions. Once the prescribed conditions meet according to the ESOP plan, the employee has the right to convert the options into equity shares based on the price determined. The ESOPs must be issued on cash and not on other considerations.
Another way to raise funds is through private placement. Instead of selling stock or bonds on the open market, a private placement allows you to sell them to pre-selected investors and institutions. It is an alternative to an initial public offering (IPO) for firms wanting to raise funds for expansion.
That person should submit the application form and pay the application money through cheque or demand draft or any online mode except through cash. In this regard, the company is required to file necessary forms and keep the application amount in a separate bank account that cannot be utilized unless the allotment of shares is made and a return of allotment is filed for the same.
Sweat equity shares determine shares that are issued to the employees or directors as Intellectual Property Rights, know-how or any value additions to the company.
These shares are issued only for considerations other than cash. You can read the difference between ESOP and Sweat Equity Shares in detail.
Angel investors lend funds in exchange for an ownership stake. They are typically high-net-worth individuals. They invest a substantial amount in companies that they see as having the potential to grow and convert from private to public in future.
Angel investors usually help start-ups in their early stages when the chances of them failing are quite high, and when most investors are unwilling to back them.
A venture capitalist is similar to angel investors but these are groups of high net worth individuals or companies that manage assets of individuals. Businesses can get capital and deals worth millions because of the vast amount of money that pours into venture capital.
Venture capitalists invest in potential businesses that have a track record of high revenues and grow over time. Their active participation is required in business operations. Venture capitalists require an exit strategy in case the companies plan to go public or get acquired by a company in future.
One of the most important sources for obtaining financial assistance is the bank. A company can readily obtain a working capital loan and a term loan from banks or other financial institutions using its assets, including movable and immovable properties, as collateral.
There are a plethora of options to raise funds for a company in addition to the above mentioned. If you’re an entrepreneur planning to start a business, getting professional legal help can make a huge difference. You can hire our expert professionals to register your private limited company. Our experts have been a part of countless success stories and we’d be more than excited to be a part of your story too!