In order to produce goods and services that enable the customer to satisfy its needs, ‘going concern‘ companies may need to finance themselves, i.e., raise more money. With the purpose of accomplishing this objective, financial managers will decide about the most suitable ways of financing their firm. There are three representative financing tools: internally generated cash flows, debt financing and equity financing.

The most common way for a company to finance itself is by using its internally generated cash flows. A firm will show an image of wellbeing by means of this mechanism. Another advantage is the fact that a firm could spend those internally generated cash flows in the best way its managers decide, as far as they do not get exhausted. Unfortunately, as these are limited and company’s needs are boundless, other ways of financing must be put into practice by businesses.

If firms need more money, they can either borrow it from banks or by issuing bonds. These financing mechanisms are frequently called debt financing. Issuing firm’s own bonds is a better option than borrowing money from banks, due to the fact that it is cheaper, since the market is a better judge of the enterprise’s creditworthiness. Thus, bondholders will lend their money at a lower interest rate. What is more, bond interest is tax deductible. On the other hand, increasing debts have got the drawback of making financial risks greater.

Finally, companies can obtain money through equity financing, which consists of issuing new shares. This type of financing is normally aimed at enabling companies to expand themselves. The main weakness of this type of financing is that stockholders become owners of the enterprise. Nonetheless, in a year without profits, companies are not compelled to pay dividends or repay share capital.

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