It is the different scenario that a business is not able to generate returns on the investment made in it. But it is a altogether different scene that the management of a business is not able to secure adequate amount of capital required for all the essential, first-time, locked-in-forever requirements of the business to create the adequate infrastructure and to commission the facility at full operating capacity. Not being able to raise the capital from traditional lending institutes such as banks does not make a business unviable!
The banks and NBFCs don’t understand what is business, how to do business, how to make money from the business, etc. They have their own norms first to be their clients (or borrowers). You are able to be considered only if you fulfill the credit norms. Further, when you are worth consideration, the amount sanctioned will have again different norms. The amount sanctioned will be completely unrelated to what is the requirement of the business; it will be related only to what guarantees and what securities you are providing to the bank. If you have X rupees of security, the bank will provide you 0.25 X or 0.5 X or maximum X rupees of loan, thus limiting your ability to raise business capital below your existing wealth.
When a business is in financial trouble, which businesses are generally in because the business is intrinsically risky by nature, the banks will not believe that the business can turn around, and again become a formidable force. If your credit history is destroyed, you no more deserve to get additional capital from the banks.
Equity capital is the solution to all these problems. Additionally, there is no fixed, periodic, guaranteed return to be made to the equity investors. They take all the risks of a business once they enter into an equity contract.
You may think, why I have not heard them or have not considered them seriously in the past. We have listed the popular misconceptions.
Benefits of M&A: