Business Financing and the Capital Structure
Business financing is the technique employed to acquire money for commerce funding. On the other hand, a capital structure denotes how firms bankroll their assets using stocks, bonds, and securities (Liu, Cowling & Ledger, 2012). This paper discusses investment bankers, debt and equity options as grounds for business financing, in the process outlining their advantages and disadvantages. Over and above that, it reviews various characteristics of the securities markets, common stocks, and corporate bonds articulating their influence on financial transactions and decision-making.
The two principal investment approaches include the debt and equity financing methods.
Debt funding involves borrowing or obtaining money loans from conventional lenders (Fisher, 2012). The commendable debt financing sources for small enterprises include Crowd funding, Trust leaf, SBA loans, online creditors, and Peer-to-peer lending. Enumerated below are the various advantages and disadvantages of debt financing (Liu, Cowling & Ledger, 2012).
- Short term needs. The debtor can secure the funds on an interim basis.
- Not dilutive. The financer does not procure any partnership of your business.
- No impending claims. After loan settlement, the creditor cannot claim more proceeds.
- Regular repayments. Stretched businesses struggle to reimburse the vast interests.
- Credit rating. Defaulting on loans blemishes a firm’s credit ratings and future funding.
This option entails bartering ownership interests, IPOs, and shares to amass capital for funding (Kadiri, 2005). For a small business, the apt equity financing suggestions include seed financing, venture funds, angel investors, mezzanine financing, and equity loans. Outlined beneath are the advantages and disadvantages of this investment alternative (Liu, Cowling & Ledger, 2012).
- Value induction. The financiers introduce you to esteemed contacts, skills, and networks.
- Shared business interests. The sponsors share joint business interests as you, therefore, consent to the support of future transactions.
- Expensive process. Amassing funds is somewhat slow, costly and demanding.
- Legal complications. Equity financing involves complying with very strict regulations.
Investment bankers are adept specialists who alleviate company value during recapitalization (Liu, Cowling & Ledger, 2012). When seeking out an investment banker, it is imperative to consider someone who is tenacious, seasoned, shares personal chemistry and has closed scores of business deals. Kadiri (2005) advises that your dealer should be part of a panel specializing in financial analysis, legal and pricing, and marketing research.
Corporate Bonds versus Common Stocks
Common stocks depict fractions of company ownership and dividends used for inflation protection and capital appreciation (Fisher 2012). On the other hand, corporate bonds epitomize credit loans dispensed by corporations to lenders, enlisted for income and safe investment (Somkid, 2010). The valuation and returns issued by corporate bonds are moderately high as they bear elevated default risks. However, common stocks grant the highest returns, as they possess the greatest risks and defaults (Fisher, 2012). As regards risks, bonds and stocks obtained from wobbly firms are precarious and vice versa. In light of the high risks engaged, it is judicious that you diversify your portfolio by way of engrossing mutual funds, bonds, real estate, and variegated stocks (10-12), all in different industries.
Security markets are financial trade places entailing exchanges of bonds, stocks, Treasury bills, and commercial papers among traders (Kadiri, 2005). These markets impose fundamental aspects such as investors, regulators, issuers, and intermediaries. Formation of security markets is mainly for the intent of steering financial proceedings by allowing lenders and security buyers to infuse funds into small and big business enterprises (Fisher, 2012). Brokers help traders in apt policy making and risk analysis.
As a present-day business owner, you should consider recruiting merged debt and equity business financing options including seed funding and trading IPOs. Moreover, you should engage a shrewd investment banker to help you merchandise in high-return bonds and stocks. As regards risk reduction, an apt dealer should enlighten you on how to diversify your portfolio by the acquisition of variegated shares.
Fisher, P. (2012). Philip A. Fisher collected works, foreword by Ken Fisher: Common stocks and uncommon profits, paths to wealth through common stocks, conservative investors sleep well and developing an investment philosophy. Hoboken: John Wiley & Sons.
Kadiri, A. (2005). Public offer of securities: The role of the auditor and reporting accountant. Securities Market Journal, 10(2), 34-41.
Liu, W., Cowling, M., & Ledger, A. (2012). Small business financing in the UK before and during the current financial crisis. International Small Business Journal, 30(7), 20-46.
Somkid, Y. (2010). The development and challenges of the Thai corporate bond market. Journal of Commerce & Management Thought, 1(4), 398-412.