One of the main upheavals that an entrepreneur faces while stepping into the world of business is arranging for fund. The entrepreneurs have to search for investors who would be interested to put their money in their business idea.
Some of them take the trouble of applying for loans. It is a hassle in itself to get the loan approved. And even after the loan gets approved, the entrepreneur has to keep in mind to repay the money back along with interest, no matter how his business goes. They can instead sell the shares of the business to fund it.
| Benefits of share capital startup | Drawbacks of share capital startup |
| No debts | Control reduced on selling shares |
| No regular repayments | Need to be in shareholders’ good book |
| No restriction on usage | Shareholders might remove current leader |
| Flexibility of finances | Expectation of share holders |
| Control over share sales | Cost involved |
| Control over share price | Not time efficient |
| Lesser risk of bankruptcy | Need to disclose information |
| More inputs regarding business decisions | |
| Expert advice |
ADVANTAGES OF SHARE CAPITAL BUSINESS
- No debts:
If someone is funding their business by selling off the shares of that very business then there is no need for the business owner to borrow capital in order to provide financial backing to their business. The business stands independent of any debts. With no debts to repay the business owner can focus on formulating ways to propagate his business and make it grow.
- No regular repayments:
When one takes loan from a bank, he has to repay the money back in installments on a regular basis over a long period of time. Same is the case if one takes loan for a business. They have to keep repaying the loan at the pre-decided regular interval even if his business goes through a rough patch.
Above that, besides repaying the main capital that he had taken loan, he also has to pay the interest for that amount of money. This is an extra pressure. In case of share capital business, the entrepreneur does not have to worry about regular repayments.
- No restriction on usage:
If the entrepreneur goes to an investor so as to fund for his business, it might not always work out well enough. Firstly, the investor needs to be interested enough in the business idea that the entrepreneur is willing to pursue. Even if he agrees to invest his money in the business, he might interfere in to business to check in on how his money is being spent. If it does not please him, he might withdraw his money or impose restrictions as to how the business should go. There will no such restriction on the usage of money for share capital business.
- Flexibility of finances:
For a business to succeed, the most important things are the idea on which the business is built and the capital to pursue that idea. After the fund has been arranged, the entrepreneur not only needs the freedom to decide how to spend the fund but also the freedom to decide how much of the fund to spend. Share capital startup gives the entrepreneur this freedom.
- Control over share sale:
Not only does the entrepreneur sells the share of the company for upgradation and growth of business, he also has complete control over the sale of the shares. He can sell the shares of his company whenever he needs to and how much ever he needs to as well as can withdraw the sale of shares if required.
- Control over share price:
The entrepreneur has truly and completely the overall control over every aspect of the shares of his company. He can decide whatever price he deems fit for the shares and sell at that price.
- Lesser risk of bankruptcy:
When only one person is liable for a whole company, the risk of the company going bankrupt is higher than when many people become liable for the same company by buying its shares.
- More inputs regarding business decisions:
The entrepreneurs do not need to make all decisions regarding the business all by himself. Even though the final decision will be his, the shareholders can put forth their opinions.
- Expert advice:
Many people who buy shares are experts in the field. If the entrepreneur is facing some dilemma or having a hard time deciding things about the company, he can take suggestions from his expert shareholders.
DISADVANTAGES OF SHARE CAPITAL STARTUP
- Control reduced on selling shares:
Selling shares means selling off a part of the company no matter how miniscule. Selling it off means losing control over that part even though it might appear to be negligible at first.
- Need to be in shareholder’s good book:
Even though the entrepreneur has the total control over the decisions regarding the company, he cannot go wayward with it and need to comply with the shareholders’ wishes.
- Shareholders might remove current leader:
Each of the shareholders have almost negligible control over the company but together they have a lot of control, so much so that they can even remove the current leader of the company.
- Expectation of shareholders:
As the shareholders have bought the shares, their intention is to reap the profit of it regardless the company. This sometimes put the entrepreneurs in a tricky situation.
- Cost involved:
The company needs to arrange events wherein they invite general public to buy the share of the company. These events require a lot of money to be organized which might be beyond the reach of many companies.
- Not time efficient:
The shareholders need to be kept update about hoe the company is doing. This might cause a distraction from the main focus of dealing with the business.
- Need to disclose information:
If the company is selling its shares, then it must disclose some information about the company to the shareholders which would have otherwise been kept private.
Share capital startup is a good way of funding business but one needs to keep in mind how much to sell so that he doesn’t lose control over his own company.
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Business, marketing, and blogging – these three words describe me the best. I am the founder of Burban Branding and Media, and a self-taught marketer with 10 years of experience. My passion lies in helping startups enhance their business through marketing, HR, leadership, and finance. I am on a mission to assist businesses in achieving their goals.