In: Finance
How does a company utilize stocks and bonds in financing growth? Identify the major sources of external financing for companies.
Imagine the following scenario. created a company, and it’s thriving. Its doing so well that company want to begin investing in other projects or even open a few more locations. However, there is one thing stopping you from doing so: the funds. This is a very common issue among growing businesses, so many company owners turn to stocks and bonds. How exactly does investing stocks and bonds help your company? The following list includes how these two financing options can benefit your company.
BONDS
Growing companies want to produce better, more affordable services, but they can only do that by hiring teams of people to work on such projects. This can, of course, be very expensive. Thus, one of the routes companies usually take to fund these projects are in the investment of bonds. Bonds are essentially an IOU to a particular organization or the government. The terms will be agreed upon, and companies can then begin using this money to fund projects. In addition, bonds also allow you to save the investors’ money, which, of course, keeps them happy.
STOCKS
Most young entrepreneurs often fund their companies through personal loans or simply by saving up for it. Although this might get your company off the ground, it will certainly not sustain it throughout its growth period. When small companies begin to do very well, business leaders are advised to hold an initial public offering (IPO) to gather funds for growth projects. Unlike bonds, stocks are not a loan but a selling of your company to investors. However, selling stock allows you to keep more of your yearly revenue for yourself, thus providing you with not only a higher income but also funds to direct towards other growth projects, which will increase the worth of your company.
EXTERNNAL SOURCE OF FINANCE
company's ability to find adequate financing sources often determines its long-term economic success. In modern economies, organizations can raise funds through a variety of channels, including financial markets and private placements. Financial markets are also called securities exchanges or capital markets. Private placement means raising funds from private investors, such as investment banks and insurance companies.
Equity
To finance short-term operating activities or long-term expansion programs, a company may raise shares of equity in financial markets, such as the New York Stock Exchange. Buyers of equity are referred to as shareholders, stockholders or equity holders. Shareholders receive regular dividend payments and make a profit when share prices rise. Raising external funds via financial markets is economically advantageous, because it provides firms with a vast pool of liquidity in both the short and long term, according to the United Nations Food and Agriculture Organization.
Debt
Debt is a short-term or long-term liability that a borrower must repay. It also may be a non-financial promise, such as a commercial guarantee, that the borrower must honor on time. A commercial guarantee is a written declaration that a business partner—such as a customer or supplier—will meet its contractual promise. A bank may provide a commercial guarantee, promising a supplier to pay for goods shipped to a customer if the customer defaults. The guarantee is non-financial because the bank does not advance funds when it signs the agreement with another party. In the corporate context, senior management works in tandem with financial analysts and investment bankers to find the best options for debt funding. Borrowers can raise funds via capital markets or through private placements. For example, a U.K.-based tire manufacturing company needs short-term cash to fund its operating activities. The company may raise funds on the London Stock Exchange or borrow from private investors.
Hybrid Instruments
Hybrid instruments are financial products that combine debt and equity characteristics. These instruments include preferred shares and convertible bonds. Preferred shareholders have the same privileges as traditional, common shareholders, but receive dividend payments before any other class of shareholder. Convertible debt holders, also known as convertible bondholders, receive periodic interest payments during the loan term. Bondholders also receive the principal amount of the loan at the time the loan matures, or comes due.
Business Partners
Business partners, such as customers and suppliers, often constitute reliable financing sources for companies in need of immediate cash, according to online educational resource Tutor2u. Partners generally have more extensive knowledge of corporate operating activities, strategic initiatives and market conditions.
Retained Earnings
Retained earnings are accumulated profits that a company has not distributed to shareholders. These earnings come primarily from prior profits and cash reserves. A company may use its retained earnings to finance its working capital if other sources of external financing are not available. Working capital equals current assets minus current debt and measures an organization's ability to pay for operating expenses in the short term.
I hope this will help you to understand
If you like my findings and my hard work
Please give it a thumbs up
Thank you in advance
From Mona......