Aspects Of Capital
The fruitfulness of revenues of a business are captured in terms of profitability and the fruitfulness of and business investment is captured in terms of returns or yield. These two terms need not be confused with each other. The money is seen as capital from the business perspective and as an investment from the investor perspective. It is important to bear in mind these two perspectives while analysing aspects of capital. It is desirable that the terms and conditions of availing capital are written down in an explicit contract rather than later bickering on them. Apohan helps a business in jotting down a professional balanced investment contract with its investor such that all of its interests are taken care.
Following is the list of the aspects or questions of the key considerations in the the financing contracts:
- Whether the investment opportunity is analysed on the basis of standard institutional rules or on financial merit of the business; does the investor have ability & mechanism to understand business?
- Whether the investor is reasonable and flexible enough to accommodate unimportant shortcomings in the processing of application;
- Whether the investor is open for negotiation of the terms and conditions in the investment contract or are the conditions very rigid;
- Whether or not a certain minimum guaranteed return, such as interest, is promised by the recipient;
- Whether the rate of return to the investor is fixed or it is dependent on business performance; whether there is an upper limit on profit shared;
- Whether the recipient business is required to repay the capital amount or not at all as in case of common equity funding;
- What is the amount of time required for the disbursement of the funds from the first contact time or application date;
- Whether the recipient requires to provide some property or asset as security at some ratio of the amount of capital; what percentage of margin money is required;
- Whether the business is required to furnish one or more guarantees including other corporate or personal guarantees;
- What is the one-time cost of raising the funds as a percentage of the amount raised;
- Is there corruption in the capital supplier institution?
- What are the flexibility is available in the repayment of the instalments of the original amount and the returns;
- Whether the investor is flexible to change the contract in due course of time looking at the circumstances of the business;
- Whether the investor requires the business to be flexible in terms of expectations capital infusion activity?
- Whether the business requires to carry out a lot of statutory compliance activity to be eligible to avail the capital;
- What are the various types of penalties in the financing contract;
- What is the risk appetite of the investor? Would he invest with known high risks? Unknown risks?
- Is the capital provider ready to take the entire risk of performance of the business? Or he wants to secure some lower side?
- What is the financial recourse to the investor if there is incurable financial default, business failure, insolvency, bankruptcy, etc? Would it take away the control and ownership of the shareholders?
- What is the difference between treatment of wilful default and performance related default;
- What is the duration for which the capital is provided;
- What is the degree of due diligence at the time of sanction of amount;
- What is the documentation involved;
- Is there scope for individual discretion in the investment decision;
- What is the amount that is being sanctioned vis-a-vis the requirement of the business;
- Whether there is dilution of control of the previous shareholders;
- Whether there is dilution of ownership of the previous shareholders;
- Whether there is going to be interference in day-to-day operational management;
- What is the expected rate of return or the interest rate; whether it is normal, reasonable, acceptable and achievable;
- Whether there are synergetic benefits of the association with the capital provider; Would the financial expertise of the investor be useful for the business;
- How many variants of the instruments of funding are available;
- Whether the instrument can be converted from one form to another form in due course of time as per requirement;
- Would the investor appreciate a peculiar situation or a hardship of a business.
These are the aspects of business should analyse before selecting a type of capital source. Every fund source has its own advantages and disadvantages. Depending upon the circumstances of the business, confidence in profitability and growth, confidence in ability to repay or give satisfactory returns, affordability, amount of capital required, probability of default, etc, a business should carefully select fund resource. Apohan will compare debt and equity options in a separate section to guide a business the specific situations in which it should go for equity funding.