SOURCES OF FINANCE FOR A COMPANY

Companies are still looking for sources of capital to expand their businesses. Funding, sometimes referred to as lending, is an act of adding money to the funding of a policy, initiative or need. The various sources of financing available to a company that is also interested to go public are:

  1. Retained Earnings:

After making income, a corporation chooses what to do with the money gained and how to spend it effectively. The retained profits may be allocated to the owners as dividends, or the corporation may decrease the amount of shares outstanding by launching a share repurchase programme. Businesses seek to increase profitability by marketing a commodity or rendering a service at a price greater than the expense of producing the products. Alternatively, the organization can spend the capital in a new enterprise, say, constructing a new warehouse, or collaborating with other firms to set up a joint venture.

  • Debt Capital:

Companies receive private debt finance through bank loans. They will also generate new funds by assigning debts to the public. In the case of debt finance, the lender (borrower) issues debt instruments, such as corporate bonds or promissory notes. Debt considerations also cover debts, rentals and mortgages. Companies who initiate debt problems are creditors because they swap shares for cash required to carry out such operations. The corporations would then repay the debt (primary and interest) on the basis of the specified debt repayment schedule and on the basis of the debt securities released. The downside to borrowing money from debt is that creditors need to make interest payments, as well as principal repayments, on schedule. Failure to do so will lead the creditor to default or default.

  • Equity Capital:

Companies may collect funds from the public in return for a proportionate shareholding in the company in the form of equity given to buyers who become shareholders after the purchase of the shares. Private equity funding can be an alternative such that there are companies or persons in the business or directors’ network willing to participate in a project or anywhere capital is required. Compared to the financing of borrowed capital, equity financing would not entail the payment of interest to the creditor.

One drawback to equity capital financing, though, is the long-term distribution of gains by all owners.

Examples: Stocks: Selling stock shares allows you to get cash inflows without adding any leverage to the balance sheet. You will have the option to issue a common stock, a preferred stock or a combination of both. The downside to the issue of common stock is that any equity you sell dilutes your share of ownership. However, there is no duty to repay when you sell the stock.

INSTRUMENTS OF FINANCIAL SOURCES:

  1. Bonds: Bond is a fixed income asset that reflects a loan given to the creditor by a lender (typically corporate or governmental). What are considered as internal instrument for raising finance? Interest rate given by an organization depends on their perceived value and financial strength. In case of bonds the company it is legally liable to pay back the principal amount of the bond along with the interest which was offered. The benefit of selling bond is that the ownership of the enterprise is not diluted. 
  2.  Line of Credit: It is an external source. The credit line is used to extend business operation or to pay off the costly that a company’s line of credit stays are available till one pays of the balance of the deposit. 
  3. Business loan: A financial institution does that decides whether a loan should be given to an organization on the requested amount.  Loan has fixed or variable interest and further the financial institution may attest a property for security purposes of the organization until the time the loan is repaid. 
  4.  Plain Vanilla debt: It is a fixed type of a bowl which has a coupon which states the maturity and is usually issued and redeemed at its initial face value. What is the kind of fixed rate boring therefore the borrower has no convertible or ownership rights. 
  5. Equity-linked Note (ELN): it refers to a debt instrument which does not incur a fixed interest rate. It is instead a category of managed asset whose return is related to the success of its underlying equity. Equity linked to an equity note could be a security, a stock basket, or a wider market index.

Aishwarya Says:

I have always been against Glorifying Over Work and therefore, in the year 2021, I have decided to launch this campaign “Balancing Life”and talk about this wrong practice, that we have been following since last few years. I will be talking to and interviewing around 1 lakh people in the coming 2021 and publish their interview regarding their opinion on glamourising Over Work.

If you are interested in participating in the same, do let me know.

Do follow me on FacebookTwitter  Youtube and Instagram.

The copyright of this Article belongs exclusively to Ms. Aishwarya Sandeep. Reproduction of the same, without permission will amount to Copyright Infringement. Appropriate Legal Action under the Indian Laws will be taken.

If you would also like to contribute to my website, then do share your articles or poems at adv.aishwaryasandeep@gmail.com

We also have a Facebook Group Restarter Moms for Mothers or Women who would like to rejoin their careers post a career break or women who are enterpreneurs.

We are also running a series Inspirational Women from January 2021 to March 31,2021, featuring around 1000 stories about Indian Women, who changed the world. #choosetochallenge

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