Raising Business Finance
Be it for a start-up or expanding business, there are ways in which capital can be raised. Either way, a balanced decision resolves the need of a firm for a financing agreement.
Indeed, the success of a business relies on how well capital investments are managed. However, raising these investments, or properly put, raising finance for the business is much tougher than just managing and allocating them.
In both start-up and business expansion raising finance is equally challenging and it will be appropriate to look for all of the potential sources and be able to weight the pros and cons of each. Carefully studying the options and having a good judgment is just the right combination in having things done properly.
Generally, there are two ways a business can be financed: the Equity financing and Debt financing.
Equity financing is same as saying issuing stock which is a share of capital investment. On the other hand, debt financing is issuing debt which is represented by bonds sold to investors. The difference is that, in debt financing there is a request for interest payments and capital repayments which usually held much security and it also a long-tem engagement for a firm; and in equity financing, the owners or the stakeholders take the risk of failure or the fruits of success, of course. Nevertheless, these two can be combined if it fits more in the business structure.
The cost of capital or the cost associated with the different sources of funds represents the amount a business must compensate for each source of funds—debt, preferred stock, common stock, and retained earnings. The cost needs to be balanced with the expected returns of investment.
Whatever the chosen course of action it is decided to take one must instill to mind that a business plan is always important. This serves as a proof of the company heeding for finance backing that they are equipped with a strategic plan that will enable them to recompense their debt. This will also enable a business to attract more investors that will help in financing the business. A strategic business plan is a firm’s weapon that will determine all its potentialities.
On the one hand, aside from understanding the advantages and disadvantages or different source of financing the business, there is also a need to recognize several conditions that may have a definite impact on the action that the company is about to take. These conditions include the economic condition, market condition, operating condition and financial condition.
Economic condition is concerned with the demand and supply of capital in the marketplace which will have an impact in the values of investment. Market condition deals with the demand for higher rates of return which will increase the cost of capital. This goes true in raising capital with a low marketable security. Review of the financial condition dictates whether the business can still cope with capital to be raised.
With these conditions in mind, one can decide what the most appropriate action to take will be.
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