Debt Financing vs. Equity Financing for start-ups and SMEs March 30, 2012

Entrepreneurs looking for funding for their start-up business can choose out of a variety of financing options. All of these financing options can broadly be categorized into – Equity Financing & Debt Financing, both of which come with their unique set of pros & cons for the entrepreneur.

While debt financing allows entrepreneurs to acquire loans from any government agency or institute, equity financing on the other hand involves, exchange of capital for a piece of ownership in the entrepreneur’s business. This type of financing typically includes angel investors & venture capitalists (VC’s).

DEBT FINANCING

Debt financing requires the entrepreneur to repay the borrowed money to the lending institute. This may include everything from a loan to bond, credit or even IOU. An important consideration with this kind of funding option is that, it requires the entrepreneur to have exceptional credit history.

Pros:

• This is looked upon as the best source of financing mostly by companies with steady growth, consistent sales & solid collateral.
• Debt financing can be obtained from Small Business Administration, commercial banks, etc.
• Here the entrepreneur gets to maintain his ownership & maximum control over business.
• The best part is that, debt financing interests are tax deductible.

Cons:

• Debt financing requires monthly payments on a regular basis.
• This sort of financing is most often limited to businesses with a solid & successful track record.
• This requires the filing of formal application either online or at the lending institute.

EQUITY FINANCING

Equity financing seeks ownership in company in exchange for money lent. This kind of financing option can prove extremely useful for start-up businesses or companies that need to raise additional equity for paying off existing debts. They however, need to display a potential to harvest large returns on investments.

Pros:

• This is looked upon as the best source of financing mainly by companies with high profitability or those with poor credit ratings.
• An ideal finance option for small start-ups that lack a solid track record.
• Equity financing can be obtained from credit cards, property equity, savings, friends & family, etc.
• Here entrepreneurs can obtain quick funds without having to worry about incurring debt.

Cons:

• The involvement of more number of investors can mean more loss of ownership control.
• Venture Capitalists or angel investors may opt to have a say in every important business decisions.
• Filing of application form is needed only for VCs & angel investors and never for friends & family.

Considering these pros & cons of debt & equity financing, it is for the SME to decide which form of financing would be best suited for their individual business needs.

 If you need assistance in debt or equity finance visit smegetmoney.com

 

 

Common question asked by a SME …When is it advisable to form a Company? January 26, 2012

As we saw earlier, in the case of small businesses with low initial capital and the core group consisting of friends, it makes sense to start with a partnership owing to the cost and speed of starting up.

A Partnership is not suitable for enterprises requiring high initial investment or where there is very valuable intellectual capital involved.

In such cases, it makes sense to form a private limited company – here the initial cost and the regulations you need to comply with are much greater, but you have many advantages too. These include:

1. Limited liability (your personal assets cannot be used to discharge the debts of the Company)
2. Easier to attract investment: A private limited company is much easier to draw investment into. You can dilute as little as 0.001% stake in exchange for capital infusion in the business.
3. Developed legal ecosystem: The legal and regulatory ecosystem surrounding companies may be rigid, but it is well developed. So for example, if you have a dispute between directors, there are many decisions of Courts and the Company Law tribunals which will provide clarity on the subject.

 If you would like legal advice on any issue, want to prepare documents and contracts or want to form an LLP, Company or Partnership, we recommend www.vakilsearch.com. SME Join Up readers get a 10% discount on vakilsearch.com services by using the coupon SMEJNP10

The Big Question: Why SMEs Want To Learn & Not Be Trained? December 21, 2011

The recent years have seen a constant debate on training vs learning for SMEs. One must understand though that there is a very fine line of difference between the two. While both are meant to impart knowledge, there is a willingness factor associated with the latter. It is this difference that is catalytic in the recent shift of major organizations from sophisticated training methodologies to informal learning.

Here are a few distinguishing factors that tempt SMEs to learn rather than be trained:

Development vs Change: The focus of learning is mainly to achieve a permanent change in behaviour that comes through varied opportunities to achieve these changes through practice or personal experience. The experience here is thus more challenging & long lasting. As against this, training emphasises on the acquisition & development of new skills through structured training. This reduces the challenge & the passion to explore new opportunities.

Formal vs Informal Learning: Training is a form of formal or structured learning wherein you are only a passive recipient of the imparted information. The actual responsibility is with the trainer. You only do what you are asked to. This is where informal learning takes a lead. You become the active recipient of information & the complete responsibility of the learning process is on you. This kind of informal learning gives SMEs a golden opportunity to explore new avenues & gain a first-hand & long-lasting learning experience.

Ability to Judge: Not many trainers will tell you the drawbacks or challenges of acquiring a particular skill. Thus, you are forced to develop your skills only because you have to. Unlike this, learning is more of a trial-and-error method where you don’t develop a skill just because you have to but because you want to. This willingness to learn new things gives you a greater exposure & activates your skill to differentiate between the good & bad.

Present vs Future: Training for most SMEs is meant only to impart skills for meeting current organizational requirements. Once the need is met, there is no future for the training acquired. Learning however is meant for long-lasting benefits. A lesson learnt today may prove instrumental in the future growth of the organization.

Known vs Ambiguous Challenges: Training most often imparts knowledge for handling current challenges that the organization may be facing. Once the challenge is overcome, you may never need the training again. However, learning prepares you for an ambiguous future. You are faced with new challenges each & every day & the learning process is never-ending.

Internal vs External: Someone has rightly said that “Where there is a will there is a way”. Learning emerges out of the willingness to learn new things & make them a part of your behaviour. It is something you willingly acquire not because you need to but because you wish to. Training is something where you are forced to acquire knowledge. Since the willingness is not all yours, the effects of training die-out after a few years.

Affordability: One major difference that sets learning apart from training is money. For you to be able to learn something, you do not necessarily need to have your wallets full. However, training you cannot think about without spending some extra bucks. Besides, the returns of investment on learning if any are lifelong. However, returns on training investments are most often momentary.

These differences are explanatory to the recent paradigm shift of organizations from training to learning.

If you are keen on learning and being updated on all workshops,seminars,events,exhibitions held in India please email us on training@smejoinup.com

To list training/event/seminar etc with us to reach to SMEs mail us on training@smejoinup.com

SME JOINUP-India’s first concierge service platform for SMEs featured on “SME WORLD” May 24, 2011

The finance minister of India, Pranab Mukherjee, might have failed to pay heed to the needs of the SMEs with the latest budget. But there is a platform which has been incorporated solely to alleviate the most common and the most critical problems faced by the SME segment in India. The portal goes by the name of SME JoinUp which is a venture of SME Networks Pvt. Ltd. and can be signed up on smejoinup.com.

Founded by Pooja Kumar, the portal focuses on three of the most critical issues faced by SMEs- money, market and outsourcing. In Pooja’s own words, “SME JoinUp is aimed at small and medium enterprises with a turnover of zero to 250 crores. It aims to build an ecosystem where SMEs can get help procuring funds, get visibility for expanding their customer base, and find the right outsourcing partners”

It has been just a year since the inception of the platform, and it already seems to be growing popular among the segment. There are more than 1000 SME owners associated with SME JoinUp, online as well as offline, and the numbers are steadily growing.

The initial success of the platform can be attributed to three factors; one, a decade of experience with Pooja in dealing with the SME sector in India, which makes her aware of the issues that this segment faces. She was VP ,Commercial Banking – SME segment, HSBC, before she decided to follow her entrepreneurial dreams; two, the fact that the platform is meant for decision makers of SMEs only, instead of the usual include-all structure; and three, the fact that the service providers who get associated with SME JoinUp go through a strict selection process. That ensures SMEs get quality service when they choose to let SME JoinUp solve their problems.

Another area which Pooja feels is very critical for SMEs is their participation in B2B events and exhibitions which the much ignored segment is yet to taste. SME JoinUp partners with selected events across India which would be valuable for her SME network .The partnership ensures not only prior information to the SME owners about the event and value it can create in their business but also the members are given highly discounted participation rates or even complimentary invites in many cases.

But Pooja seems to have a lot more ideas up her sleeve which sure look like they could add real value to the SME segment in India. She says,”We plan to introduce concierge services for SMEs in the near future, which will be the first of its kind. Inspired from the concept of relationship managers in banks and concierge in hotels, a dedicated manager would be appointed to each SME, who will make sure that every need of the enterprise is promptly met”

Apart from that, she also plans to launch two more associated portals very soon to make it easier for small and medium enterprises in India reach success. The first of these portals is techJoinUp.com, which is a marketplace for IT/ITes companies in India, where they can get international projects. The lack of international exposure for SMEs hurts them in the long run, and the portal definitely holds a lot of promise for them.

The second is smegetmoney.com. As the name suggests, it will be a portal meant to solve the finance needs of SMEs. Going by all that, it definitely looks like there’s finally somebody out there who is ready to help the SMEs in India. However, continued dedication and support is what is required to make it a truly valuable proposition for the small fish in the large corporate pond.

Original Source:SME WORLD (smeworld.org)