Types of Funding Instruments:
Part 1
Over the past 3 weeks, we wrote about understanding the stage of your business, the different forms of funding as well as the valuation methods that can be used. One of the most important decisions that entrepreneurs and business owners will need to make when raising capital is deciding what type of capital they need which will determine what type of funding instrument will be required. There are various funding instruments, and they are dependent on various risk profiles amongst other factors.
In today’s article we will cover part 1 of 2 for different types of funding instruments.
Equity
Equity funding is where investors inject money into a business in exchange for shares /equity in the company. This is usually the highest level of risk as investors not always guaranteed their capital. This then will require an investor to have equity in a particular business as compensation for this risk. Ordinary shares and preference shares give shareholders ownership, however they come with different shareholder rights and “repayment” terms. Preference Shares have preference/priority over ordinary shares in terms of repayment and is normally linked to a coupon rate.
Loan and Debt
This is a common instrument used and is a usually a term loan from the banking institution to an operating company. There are often repayment terms which are linked to cashflow repayments over a specified period. In other words, the loan needs to be serviced with interest or interest and capital repayments over a specified term. The institution providing the loan will usually ask for some form of security in the form of an asset which can be provided as security for the loan in even of a default. This can take the form of assets such as property, shares, equipment, or machinery. A lending value is usually applied to the asset value. A loan is often repaid first in terms of risk profile.
It is important to research what capital is available and what the pre-requisites that are necessary to have smooth access to the type of capital that matches the need. Contact us at Discala Holdings to assist you.
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