Resource Mobilization and Enterprise Finance
What the domain tests
Sources and types of finance, matching finance to need, capital structure, and Indian funding schemes and institutions.
Fixed and working capital
Fixed capital funds long-term assets - land, plant, machinery. Working capital funds the operating cycle - raw material, wages, receivables, cash - and equals current assets minus current liabilities. Match tenor: long-term needs with long-term funds, short-term needs with short-term funds. Funding a machine with an overdraft is a classic error.
Sources of finance
- Equity/owner's funds: personal savings, friends and family, angel investors, venture capital, private equity, IPO. Equity holders are owners, receive dividends, and rank last on winding up.
- Debt: bank term loans, working capital loans, overdrafts, debentures, trade credit, lease and hire purchase. Debt carries interest and repayment obligations; interest is a charge before tax.
- Internal: retained earnings, bootstrapping.
- Government and institutional support: MUDRA loans in three categories - Shishu, Kishor and Tarun; Stand Up India; Startup India Fund of Funds; CGTMSE credit guarantee (a guarantee, not a loan); SIDBI, NABARD and NSIC.
- Crowdfunding: donation, reward, equity and peer-to-peer lending; confirm the regulatory position before using any route.
Capital structure
The debt–equity mix. More debt raises financial risk and interest burden, but can lift return on equity when earnings exceed the interest cost.
Worked example
A unit needs ₹20 lakh: ₹10 lakh machinery (long-term), ₹6 lakh raw material and receivables (short-term), ₹4 lakh promoter margin. Fund the machinery with a term loan repaid over five years; cover the working-capital gap with a cash credit limit renewed annually; meet the margin from savings and an angel investment. Repayment then matches cash generation.
Traps
- Calling venture capital a loan; it is equity.
- Thinking CGTMSE lends money - it provides a guarantee.
- Forgetting MUDRA's Shishu, Kishor and Tarun categories.
- Using long-term debt to finance working capital.
- Assuming equity crowdfunding is freely available in India.