Question

The advantages and disadvantages have been discussed in depth. Explain your views on this post.

Companies have many options far as financing is concerned and with these options comes advantages and disadvantages. A company that chooses to issue bonds can expect the following pros and cons:

-Pros: Borrows funds from bondholders to achieve the amount needed. Southwest Airlines can issue out bonds to get the airplanes they need (Braun & Tiez, 2018). Southwest can issue out bonds to several bondholders and can receive little amounts of money from each bondholder.

-Cons: For the bondholders, if they were overextending their funds to a particular company they can end up losing all their money. Shareholders can also fail by investing in a company with a low turnover ratio for it will take them longer to pay back the bonds. "Companies with shorter payment periods are generally better credit risks than those with longer payment periods".

Issuing bonds are just one of the option a company has when it comes to the concept of financing. Another option is borrowing from the bank. When borrowing from the bank, consider the following benefits and limitations:

-Pros: An alternative to borrow money without commitment or involvement needed after loans are paid off (DeMarceau, 2018). Per DeMarceau (2018), Banks "do not take any ownership position in businesses" (2018).

-Cons: Viewed as last resort due to restrictive debt covenants (Renaud, 2018). Examples by Renaud (2018) of restrictive debt covenants are "They can't issue any more debt until the bank loan is completely paid off. They can't participate in any share offerings until the bank loan is paid off. They can't acquire any companies until the bank loan is paid off" (2018). Bond markets perform to be also merciful than banks and frequently perceived as being comfortable to do business with (2018).

The last type of financing that needs review in this post is Equity financing. Per Kunigis (2017), there pros and cons to equity financing and there are the following:

- Advantages: Considered to be the less stressful option. No need to worry about credit. Learn by experience and partnerships. No monthly payments needed.

-Disadvantages: You must share your profits. Loss control of the business. Conflicts between having to adapt to other's vision and mission for your business.

Answer 1

The paragraph highlights the advantages and disadvantages of various forms of financing available to any company. The most important sources of finance include debt and equity. Debt borrowings can be in the form of bonds or loans from banks/financial institutions. Equity indicates issuance of shares of the company to outside parties to raise capital.

Issuance of bonds would involve fixed obligation to pay interest to the bondholders, thereby, increasing the financial risk for the company. The company will have to meet this obligation even if there is no profit in any year. Further, investors normally prefer to invest money in companies which carry a lower amount of debt in their capital structure. Inclusion of more and more debt can limit a company's ability to attract investment from external parties. A similar situation would arise in case of borrowings from banks/financial institutions. Here again, the company will be required to pay a periodical sum (repayment of a portion of principal amount borrowed together with interest) to the institution from which the funds have been borrowed. Further, various restrictions (in the form of debt covenants) may be imposed on the company which may limit its ability to raise additional capital or pay dividends or use its property for obtaining loans, etc. These restrictions can have a severe impact on a company's growth plans particularly if it is planning to expand its operations or undertake new projects. Therefore, the company should try to reduce the proportion of debt in its capital structure.

Equity is another method of raising large amount of capital. This form of financing involves no fixed obligation in the form of interest and, therefore, the financial risk may not be as high as in the case of debt. The company may or may not pay dividends to the shareholders. However, a company financed with equity is subject to various financial and legal compliance requirements to ensure that the investor rights are protected. Further, outside parties having significant investments in the company may influence the decisions taken by the management and try to interfere in the functioning of business operations. Family owned businesses may not prefer to use equity as a means of obtaining finance for the fear of losing control over business operations/decisions. A company reporting losses on a frequent basis may find it difficult to keep its investors satisfied. In such a case, investors may look for other opportunities and withdraw their holdings from the company.

Therefore, both the forms of financing have their own associated advantages and limitations. The company can select an appropriate combination of debt and equity to keep its overall cost of financing at a lower level and also reduce its financial/business dilution risk. However, it is generally advisable to include lesser debt in the capital structure. The selection of financing method may depend on the size and nature of the business and risk appetite of the management.