Question

There is an IT Software Company (Company providing service) would expand right now company it's in the maturity stage.

What’s the best method suite the company enter to maturity stage.

Please discuss all listed option along with advantage and disadvantage

1.Bridge Financing

2.Issuing bond

3.Bank Debt

4.Private Equity

5.IPO

Answer 1

1) Bridge finance: A bridge loan is a short-term loan used until a person or company secures permanent financing or removes an existing obligation. It allows the user to meet current obligations by providing immediate cash flow. Bridge loans are short term, up to one year, have relatively high interest rates, and are usually backed by some form of collateral, such as real estate or inventory.

Advantage:

1. It’s a Quicker Way to Obtain Financing

2. There’s No Need to Relinquish Control of Your Business

3. It’ll Help You Navigate Long Payment Cycles

Disadvantages

1. Payments May Be Larger

2. It Can Be Risky if Future Payment Falls Through

3. There May Be Higher Interest Rates Relative to Traditional Loans

2) Issuing bonds: Issuing bonds is one way for companies to raise money. A bond functions as a loan between an investor and a corporation. The investor agrees to give the corporation a certain amount of money for a specific period of time. In exchange, the investor receives periodic interest payments. When the bond reaches its maturity date, the company repays the investor.

Advantage:

a) not diluting the value of existing shareholdings - unlike issuing additional shares

b) enabling more cash to be retained in the business - because the redemption date for bonds can be several years after the issue date

Disadvantages:

a) regular interest payments to bondholders - though interest may be fixed, the interest will usually have to be paid even if you make a loss

b) the potential for your business' share value to be reduced if your profits decline - this is because bond interest payments take precedence over dividends

3) Bank debt: Bank debt is a long-term liability a business takes on by borrowing money from its bank. It appears under liabilities on the balance sheet as part of all the money the company owes its creditors.

Advantage:

a) Retain control. When you agree to debt financing from a lending institution, the lender has no say in how you manage your company. You make all the decisions. The business relationship ends once you have repaid the loan in full.

b) Tax advantage. The amount you pay in interest is tax deductible, effectively reducing your net obligation.

Disadvantages:

a) Qualification requirements. You need a good enough credit rating to receive financing.

b) Collateral. By agreeing to provide collateral to the lender, you could put some business assets at potential risk. You might also be asked to personally guarantee the loan, potentially putting your own assets at risk.

4) Private equity: Private equity is an alternative investment class and consists of capital that is not listed on a public exchange. Private equity is composed of funds and investors that directly invest in private companies, or that engage in buyouts of public companies, resulting in the delisting of public equity. Institutional and retail investors provide the capital for private equity, and the capital can be utilized to fund new technology, make acquisitions, expand working capital, and to bolster and solidify a balance sheet.

Advantages:

Large Amounts of Funding, Active Involvement, Incentives, High Returns

Disadvantages:

Dilution/Loss of Your Ownership Stake, Loss of Management Control, Different Definitions of Value, Private equity firms are looking for particular types of companies to invest in.

5) IPO: An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance. Public share issuance allows a company to raise capital from public investors. The transition from a private to a public company can be an important time for private investors to fully realize gains from their investment as it typically includes share premiums for current private investors. Meanwhile, it also allows public investors to participate in the offering.

Advantages:

a) The company gets access to investment from the entire investing public to raise capital.

b) Facilitates easier acquisition deals (share conversions). Can also be easier to establish the value of an acquisition target if it has publicly listed shares.

c) Increased transparency that comes with required quarterly reporting can usually help a company receive more favorable credit borrowing terms than as a private company.

Disadvantages:

a) An IPO is expensive, and the costs of maintaining a public company are ongoing and usually unrelated to the other costs of doing business.

b) The company becomes required to disclose financial, accounting, tax, and other business information. During these disclosures, it may have to publicly reveal secrets and business methods that could help competitors.

c) Significant legal, accounting, and marketing costs arise, many of which are ongoing.