It is one of the interesting topics for me to read and to write. An entrepreneur with enterprising skills will always look towards for the expansion of his business by adopting various growth strategies. In fact growth is the main objective of all the business irrespective of its areas of operation, country of operation and method of operation. In order to achieve the targeted growth an enterprise has to identify and grab the fuel for travelling that path in smoother manner. That fuel is nothing but the capital to invest.
There are multiple ways to attain the desired capital to fuel the growth strategies. The major factor to be considered for raising the capital is the readiness of the promoters to dilute their holdings in the entity. There are other ways through which the the company can identify the capital without diluting the promoter’s holdings also. In this article we are discussing few of the ways through which a business can identify the capital to fuel its growth strategies.
Ploughing back the profits.
This is the most common method to adopted by many of the Corporates to attain the planned growth. In this method the the company will reinvest its profits / reserves into the business and thereby fuel the growth of the company. The major advantage of this is the undisturbed membership portfolio of the company. The Company can capitalize its profits through bonus issue and thereby reward the investors. This method can be adopted in case of cash rich companies which is having actual money in their back account, which is free from any encumbrance.
Borrowing from Banks/Financial Institutions.
Another acceptable and easily available fund is the borrowed fund. The Banks and Financial institutions shall provide the required funds after ensuring proper debt equity ratio, adequacy of the Primary and Collateral security, policies of the RBI etc. In case of borrowed funds the company have to devise a proper repayment plan of action to service the said facility. If the growth strategies of the company is having a long gestation period it is not advisable to invest the borrowed money into that as the cost of that money will be much higher on attaining the operational / revenue generation stage. The major advantage of borrowed fund is the non-dilution of the capital base of the company.
Increasing the capital base through “Rights issue”.
In this mode of capital generation, the existing equity shareholders are provided with opportunity to participate in the capital contribution of the company in equal proportion of their holdings and thereby maintaining the same control ratio in the company. This can be adopted in the absence of the reserve capital and borrowed fund. The Rights issue will be successful only if the existing shareholders are confident in the performance of the company and satisfied with the Governance, risk and compliance aspects of the company.
Infusion of fresh capital of the company.
The board of directors of the company can identify fresh capital through private placement route in partial dilution of the existing capital of the company and thereby give away partial control over the company. The company can go in from fresh equity or preference shares or convertible debentures or non- convertible debentures or for part issue of shares and part issue of debentures. This is the most cheapest fund available towards capital of a company as there is no assured returns for equity capital.
Inorganic way of attaining the growth.
In order to attain the desired growth in a swifter manner the companies would go in for amalgamations, consolidations, mergers and management bailouts. The advantage of this kind of expansion strategies are lesser or no cash outflows. The companies would adopt the amalgamations and mergers as an easiest way to expand its market presence, market share, adjusting the internal cash flows in a tax effective manner etc. In today’s fast changing Corporate field and growing market conditions the inorganic way of growth is the most desirable The companies would consider the tax implications, dilution of the capital base, group considerations etc before plunging into the scheme of amalgamation/ merger.
Based on the merits of the matter, requirement of the fund and the gestation period of the project the management of the company can adopt any of the above steps to identify the capital to fuel its growth strategies.