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Equity v/s preference v/s loan from shareholder

CS Smriti Sharma (ACS, B Samrish & Co.) (880 Points)

25 June 2012

Dear Member

Can anyone please provide me with Comparative analysis of capital injection by way of Equity V/s Preference V/s Loan from Shareholder. Which one is better & why.

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4 Replies

Anita Sethia ( CS ) (150 Points)
Replied 25 June 2012

hi, it depends on the foundatin &strength of company usually equity capital is preferable but according to cost of capital loan is preferable

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CA Lokesh Pokharna (CA (Ahmedabad Bhilwara Chittorgarh)) (4128 Points)
Replied 25 June 2012

hi its like that if market is like that where heavy demand is available, and you are able to sells all of your production. then i can say use much portion of loan becuase its tax dedctible item... and if if there is market like of recession (means very less demand) then you need much portion of equity in your capital structure.. preference capital only to be when you are not able to raise funds via equity & loan...

many other factors affect this decision:

1. market condition ( as i mentioned earlier its a key feature)

2. working capital requirement

3. interest rates on loan

4. demand,supply ratio of your product.

5. risk taking capacity

6. current production capacity utilization v/s probable prod. cap. utilization

7. sales capacity

.. there may be many other factors... other views are welcome...

regards- Lokesh Pokharna

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CS Smriti Sharma (ACS, B Samrish & Co.) (880 Points)
Replied 25 June 2012

Thax, but Kindly let me know w.r.t Private Limited Co.

CA Lokesh Pokharna (CA (Ahmedabad Bhilwara Chittorgarh)) (4128 Points)
Replied 25 June 2012

if your company is p .ltd ,. then your company cant raise funds via issuing equity shares to public , hence you need to borrow money eihter as a loan or internal equity.. if u unable to raise maoney via fresh equity then you need to borrow money from banks, fi as a loan.