Question

Respond to each short answer question using two to three well-constructed paragraphs (150 – 250 words) containing specific details and examples that support your understanding of the concepts.

1. How do businesses raise funds? Explain how these methods differ from each other.

Answer 1

A Business gets two main sources of funding namely debt financing and equity financing. Lets explain each one in detail.

(1) Debt Financing - When businesses needs funds they can take a loan from an individual, bank or a firm. When a business takes a debt it is the liability of the business to pay back the amount plus the interest rate. Debt financing is provided to a business by people who don't have any ownership stake in the business but fixes the time by which the interest and the principal amount should be paid back. Debt financing requires collateral and mortgages to be kept with the owner of the debt in case the borrower defaults. Some examples of debt financing instruments are bonds, debentures, bills of exchange, etc. Example of a firm who took debt financing is The Scooter Store, which is a portfolio company of Sun Capital Partners received $25 million debt financing from Crystal Financial in 2011.

(2) Equity Financing - A company receives equity funding by transferring some part of the ownership of their firm to the investors. Equity financing has the benefit that it does not require mortgages and fixed interest payments in order to get the funds like debt financing but equity financing has the disadvantage that it dilutes the ownership of the firm to other stakeholders. There are many ways to get equity funding such as incubators and accelerators and venture capitalist who provide funding to businesses who are at an early stage i.e. the businesses who are just beginning the business or have been in the business for a short while and are not well established yet. Private Equity Investors are those who invest in business which have already been while for sometime and are well established in the market. Example of a firm who took equity financing is Blackbuck, an indian startup who raised raised $30 million total, $25 from Tiger Global and $5 million from Accel Partners and Flipkart in 2017.