Question

Explain the major advantages and disadvantages of issuing stock as a source of long-term financing.

Answer 1

Advantages:

1) If your business doesn't have a stellar credit rating, you may not be able to borrow the money you need. If you incorporate, you can sell stock in your company instead. This is particularly attractive if you are a start-up with no track record. You can attract these investors based on your potential for profit and growth.

2) Selling stock gives you the advantage of not owing any money to investors, because you are not borrowing. You don't have to make any payments for the money you raise this way. In addition, a rising stock value can increase your credit rating and make it easier to borrow money in the future. Also, the constant need to justify your actions to shareholders can give your company a sharp focus and profitability.

Disadvantages:

1) The primary disadvantage of issuing stock to raise capital is that founders and owners begin to lose ownership of the company as more shares are sold.

2) Also, investors might pressurize you in paying the dividends in future, as the company becomes profitable