9 + Sources of Finance for a Business

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Raising finance is a key activity for an organization. Without sufficient capital or finance organizations are not able to go for further business expansion as well as strong positioned for long-term growth exploring research and development activities. Financing needs can be met through using equity finance and debt finance. Both sources are very important to organization that wish to raise finance for meeting their business needs.     

Equity financing is one of the most lucrative sources of financing. Equity financing is a systematic way of transferring company’s common stock or preferred stock to general investors and institutional investors as well. 

It is a means of selling ownership interest of an organization in exchange of capital. Equity financing is long-term and permanent source of financing because it is available for use as long as the organization goes. Equity financing helps to build the organization’s financial base and as a result of strong financial base organizations go for geographical expansion through diversification its lines of business and making sure sustainable growth. 

Available Options For Raising Equity Finance

There are different sources of equity financing available to organizations. But organizations have to choose best alternative financing source that will generate maximum returns and influence an organization for a life time. Most widely used source of equity financing is listed as follows:-

Initial Public Offerings (IPOs): Initial public offering is a common and most widely used source of equity financing for an organization. When organizations want to raise equity funds through public listing then initial public offering is right decision for them for example, Facebook Inc raises $ 5 billion from its IPO. Through Initial public offering a company first time sells its stocks to the general public as individual shareholders and institutional investors. The most common forms of IPOs are equity securities, fixed income securities and warrants. Initial public offering makes possible for accessing a large amount of capital with a cheaper cost of financing. 

Venture Capital:Venture capital provided by venture capitalists who invest with fast-growing, high potential, high risk and growth start up companies. Venture capital is equity investment in new and growing organizations. Venture capitalists provide not only capital in the firms but also help in supplying management expertise. Venture capital plays a key role for small and startup business and it is used as an alternative source of initial public offering, which is somewhat difficult for small, and start up companies going public listing. 

Retained Earnings: Retained earnings facilitate a firm to survive continuing business operations and business fluctuations. It is a widely used as an internal source of equity financing by most of the organizations and it is a cost effective source of equity financing. Retained earnings create a strong financial base and superior resistance power for the industry to face economic slowdown and it ensures business expansion and other development schemes.    

Rights Issue: Companies may also source its equity capital through issuance of right shares to its existing shareholders. Rights issue is exclusively for company’s existing shareholders and most of the cases rights’ offering subscribed at discount to the current market price of the company’s stocks. 

Available Options For Raising Long-Term Debt

Long-term debt financing means when an organization, is looking for financing source in order to raising finance, borrows money from available alternatives source for example, bank. The organization has to pay off its debt within a specified period along with interest. 

Unlike equity financing, debt financing has no ownership interest in the organization. Debt financing can be short-term as well as long-term. Raising long-debt term finance is vital for all kinds of organization to facilitate sustainable growth of business. The most common source of long-term debt financing is as follows:-

Long-Term Bonds: Long-term bonds are fixed obligation debt and it pays a fixed amount of interest to the holder of bonds. Bonds provide long-term financing facility and a source a huge amount of capital need for an organization. Therefore, long-term bonds can be an attractive financing option for borrowers. As bonds are long-term source of financing, its rate of interest also little bit higher than any other long-term debt financing option. 

Debentures: Debenture is an unsecured bond and it has no lien against specific property as security for the obligation. Debenture is issued by financially sound organizations as it is unsecured debt instrument. Therefore, debenture is widely used as a source of long-term debt financing. 

Preferred Stock: Preferred stock is a lucrative source of long-term financing option that combines features of equity and debenture as well. Preferred stock generally does not have voting rights like equity holders but they have some preference on dividend payment over equity shareholders. 

Mortgage Loan: Mortgage loan is also another source of long-term financing and companies often go for mortgage loan in order to facilitate long-term bank loan facility. Mortgage loan is secured by company’s tangible fixed assets and they take mortgage loan using their own property as a security for that loan. 

Bank Loans: Bank loans are important source for financing. Generally banks provide both short-term and long-term financing to its borrowers. Syndicated bank loan is a special kind of long-term financing for firms where a number of banks allocate a big project financing for long-term basis. 

Lease Financing: Lease financing is one of the best alternative sources of long-term financing. Companies do not have to incur its own funds for procuring assets rather than leasing company purchase on behalf of its client i.e. borrower. Lease payment is exempted from tax and therefore, organizations try to get much more lease financing facility as a long-term financing source.  

References

Brigham, E. F., & Houston, J. F. (2011). Fundamentals of Financial Management, Concise. 7^th Ed. Kentucky: South-Western College Publishing.  

Horngren, C. T., Foster, G., & Datar, S. M. (2000). Cost accounting: A managerial emphasis. 14th Ed. Upper Saddle River, New Jersuy: Prentice-Hall. 

Reilly, K., & Brown, C. (2009). Investment analysis and portfolio management. 4th Ed. Mason, OH: USA: Thomson/South-Western.