Finance5946

There are a lot of ways of financing a company, but the main ones, or at least the ones used the most are: equity financing (issuing shares), debt financing (issuing bonds) and getting a loan from a bank; each with its advantages and disadvantages.

In a capital increase (rights issue), the company does not need to return anything back, because it is not actually borrowing money, just increasing the number of shares of the company. The problem of this is that each time shares are issued, the annual profit has to be “shared” among more people. In addition, management costs are higher than loan costs. Contrary to what happens with bonds or loans, the company is not obliged to pay dividends, although is very recommended as long as it is profitable.

Bonds issue. In this case, ownership will not be diluted by adding more owners as what happens with equity financing. It is more like asking small investors to lend money to the company, in exchange for an interest payment during a given period of time. At maturity, the company pays back the principal; the original amount of money received. Costs for the bond issue are normally lower than for a rights issue.

Finally, the company can always go to a bank for financing. Once the bank has studied the company’s accounting and the purpose for the loan, will give a loan (0r a credit line) in exchange for an interest payment and collateral (company guarantee in case of default). Management costs are quite low and it is a relatively fast way of borrowing money.

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