Question

How does a company utilize stocks and bonds in financing growth? Identify the major sources of external financing for companies.

Please do not copy and paste, thank you.

Answer 1

Stocks. Bonds are debts while stocks are stakes of ownership in a company. ... On the other hand, bonds often operate off of fixed interest rates that the entity buys from the investor, which will frequently pay out annual interest rates to investors while repaying the amount in full at a given time

Bonds vs. Stocks

Bonds are debts while stocks are stakes of ownership in a company. Because of the nature of the stock market, stocks are often riskier short term, given the amount of money the investor could lose virtually overnight. However, long term, stocks have historically proved to be very valuable.

On the other hand, bonds often operate off of fixed interest rates that the entity buys from the investor, which will frequently pay out annual interest rates to investors while repaying the amount in full at a given time. For this reason, bonds are generally considered a safer investment in the short term or for new investors.

Additionally, stocks and bonds are sold differently.

External financing is any kind of business funding you acquire from sources outside the company. Bank loans, investments from private individuals or investment firms, grants and selling company shares are all examples ofexternal financing.

Types of External Financing

All for-profit businesses need some sort of financing or monetary source to start and maintain business operations. Once you get going, you could generate enough from operating revenue to fund ongoing business activities. However, many companies must turn to external financing, or outside sources of money to fund operations. In general, external financing includes equity investment and loans.

Equity Investment

Equity investment means that you accept money from a private investor or group in exchange for partial ownership of the business. This funding source is commonly used by small-business owners who want to quickly grow the business. With equity investment, you don't take on debt and you don't have to repay the investment. However, you do give up some ownership and control of the business. Major investors often want a seat on the company board and a say in how you operate the business.

Long-Term Debt

One type of external debt financing is long-term debt. Long-term loans typically include any debts that you expect to take more than a year to repay. Commonly, though, your long-term loans are used to purchase buildings, equipment and other major assets. An advantage of long-term financing is that you can repay the loan over an extended period, which minimizes your monthly payment obligation. Plus, interest on property purchases is often tax-deductible. One drawback to this type of loan is that it's usually secured by property, meaning if you can't take it back, the lender can seize your building, equipment or inventory.

Equity Investment

Equity investment means that you accept money from a private investor or group in exchange for partial ownership of the business. This funding source is commonly used by small-business owners who want to quickly grow the business. With equity investment, you don't take on debt and you don't have to repay the investment. However, you do give up some ownership and control of the business. Major investors often want a seat on the company board and a say in how you operate the business.

Long-Term Debt

One type of external debt financing is long-term debt. Long-term loans typically include any debts that you expect to take more than a year to repay. Commonly, though, your long-term loans are used to purchase buildings, equipment and other major assets. An advantage of long-term financing is that you can repay the loan over an extended period, which minimizes your monthly payment obligation. Plus, interest on property purchases is often tax-deductible. One drawback to this type of loan is that it's usually secured by property, meaning if you can't take it back, the lender can seize your building, equipment or inventory.

Short-Term Loans and Lines of Credit

Some businesses also make use of shorter-term loans and lines of credit to fund ongoing operations. A short-term loan means you borrow money and typically repay it within a year. This loan scenario could apply when you have an emergency need, but the dollar amount is more modest. A line of credit means the bank gives you access to funds up to a certain amount, but you only borrow them as you need them. This approach is great for a relatively new company with uncertain costs during the first year or two of operations.

Business Accounts

Another common, simple form of external debt financing is payments on account. When you buy supplies and inventory, your suppliers often offer payments on account as opposed to upfront cash. The terms of accounts payable can vary, but you normally have at least 30 to 60 days to make payments. While this financing source is limited, it does allow you to keep inventory coming in and make payments as you generate revenue from it.